Calculating Inheritance Tax: A Step-by-Step Guide for Advisers: Q&A

Are they allowed to claim care costs where it has been paid by a child of the deceased.

I assume this was to do with whether this would be a deduction from the parent’s estate for IHT. Provided the estate is legally liable for those costs and the amount is actually repaid, the amount owed to the child is a deductible liability of the estate for IHT purposes.

Gifts made in the last 7 years not mentioned in Estate's asset description, unless included as a gift with reservation?

Non-exempt gifts in the 7 years before death are not included in the net estate unless they are subject to a gift with reservation. These gifts are still subject to IHT, will use up nil rate band available to the death estate and may suffer their own tax liability but they are not technically an sset of the estate on death. This is why for the purposes of the residence nil rate band, gifts (unless a GWR) are not included in the estate value for the taper calculation. 

Apart from remaining monies left in a Loan Trust, does a bond in trust that has passed 7 years need to be reported for Probate or on any IHT forms.

Once the seven‑year period has passed, unless the gift is subject to a reservation of benefit, it will no longer be included when calculating IHT on the death estate. However, on the IHT403 form HMRC do ask for information relating to gifts with reservation as well as any gifts made in the 7 years preceding gifts made in the 7 years before death. This last point is because there are circumstances where a failed potentially exempt transfer is subject to tax after cumulation with chargeable lifetime transfers in the 7 years before the gift itself.

HMRC allow a 10% discount on the value of the half share of jointly owned property. Can this be applied to any other jointly owned (no property) assets?

Valuation discounts are not limited to property. They can apply to any jointly owned asset where there is a genuine lack of control or marketability, but it comes down to evidence and professional valuation.

But please note that there are related property rules that could impact any discount. So we would recommend clients seek professional advice on this matter.

If directors loan from father to son in son's business and son's company does not have money to pay it back, how does loan affect value of estate?

The loan is an asset of the father’s estate and should be valued at what is realistically recoverable.

A client has two unit trust regular savings accounts for two grandchildren who live abroad. How can he plan to avoid IHT on these plan values when he dies?

I would first check exactly how these accounts have been set up. They could be accounts owned by the grandfather which are simply designated under the names of the grandchildren. It is also possible that they are already subject to some kind of trust arrangement. I would guess its more likely that the accounts are not under trust but you should check with the provider and read the terms and conditions of the arrangement. If they are not in trust they will form part of the grandfather’s estate for IHT. If he wants to get these out of his estate then he could make a gift of the investments to the grandchildren or place the investments into a trust. Either way he will be making a gift for IHT purposes so it will be 7 years before the gifts falls out of his estate. Given that the grandchildren live overseas in our view, you would need to investigate the tax implications of either of these courses of action in the country concerned before making a recommendation. Otherwise its impossible to tell whether the recommendation is suitable.

Gift to non Long Term Resident spouse- they used to be able to state they wanted to be treated as UK domiciled to get full exemption- has this changed?

No it has not changed, it is still an option. A non-long-term UK resident spouse can choose to be elected as a long-term UK resident, and this would ensure the spousal exemption would apply. But it would mean that their worldwide estate would now be subject to UK IHT. Before making an election of this kind, the client should seek professional advice.

Is the gifting exemption for gifts to a non-UK domiciled spouse in addition to the NRB (i.e., also £325K), or are the gifts covered by the NRB if available?

The £325,000 spouse exemption for gifts between a UK long term resident and a non-UK long term resident is in addition to the nil rate band.

I've seen conflicting information on gifts to churches. I've got a client who gifts to her small local church, is that exempt?

It could be, but we recommend seeking clarity with the church in question. HMRC do provide some guidance in their IHT manual about what might qualify. 

Will the 10% charity rule work if a sufficient amount of a pension is left to charity?

The legislation has not made any changes to the 10% provisions so the only conclusion to be made is that post April 2027, amounts left to charity from a pension should be taken into account for the 10% test.

Ltd company held buy to let properties?

I have assumed this is to do with whether the company would qualify for business relief. Generally, a company that is simply holding buy‑to‑let property is treated as an investment business. That means business property relief is not available and the value of the shares is included in the estate at market value. HMRC have a whole section in the IHT manual relating to investment business which can be found here. 

How is Forestry / Woodland considered as far as inheritance tax planning and a client's total value of the estate is concerned?

Forestry and woodland need to be split out. The land itself can qualify for agricultural property relief where the conditions are met, while the timber is usually treated separately and can qualify for business property relief. Importantly, even where relief applies, the value still sits in the estate for calculation and taper purposes.

But please note that this is a very complex area of advice that requires the involvement of a specialist.

If a nursery uses a director personally owned property, does that property qualify for BPR, or is its full value instead included in the directors taxable estate?

Personally owned assets such as land, buildings, plant or machinery, that are owned by an individual but used wholly or mainly by their company or partnership can qualify for Business Relief (BR) for IHT purposes.

Under HMRC rules, these assets are treated as “relevant business property” and generally qualify for 50% Business Relief, provided that:

• The asset has been owned for at least two years before the transfer; and
• It is used wholly or mainly for the purposes of the trading business carried on by a company or partnership controlled by the owner.

Can you explain the point you made on equity release and business relief not working as expected (at 10:17)

Equity release to fund the purchase of property eligible for APR or BPR will be deducted from the value of the APR/BPR assets acquired with the borrowed funds. This is the case even if the equity release loan is secured on other assets (e.g. the main residence). This legislation was introduced by HMRC as a way to prevent people benefitting from APR/BPR, whilst also simultaneously benefitting from a deductible loan.

For example, if somebody releases £500,000 of equity from their main residence and then places £500,000 into a BR qualifying investment, then the value of qualifying BR at death will be £0, as the equity release loan is deducted from the value of the BR property (£500,000 - £500,000).

But note, there are no rules preventing equity release being taken and the funds then being gifted.

If you invest in BPR, are you saying that even after 2 years its still in the 'net estate' and liable to RNRB taper?

Yes. Business property never leaves an estate unless it is gifted. As it is in the net estate then it counts for the RNRB taper.

Is there pressure on the Gov to bring BPR in line with AIM on the reliefs?

There is ongoing political and media discussion around business property relief, including AIM, but at the moment there are no confirmed changes and advisers should plan on the rules as they currently stand.

A sole trader with a leasehold shop 200k and other buss assets 300k, will £500k qualify for BR? If they forms a ltd co, then will the leasehold shop moved to ltd c

Assuming it is a genuine trading business, the assets used wholly for the trade can qualify for 100% business relief. Incorporation changes the analysis, but relief can still be available if the conditions are met. They should seek specialist advice before making any decisions as there are various factors that need to be considered in determining whether this would be appropriate.

Transferable nil rate band - no matter when first spouse dies - wrong? ie dies before IHT when was estate duty

It is potentially possible to claim unused nil rate band where the first spouse died under the Estate Duty regime. Even thought there was no “nil rate band” as such there was an amount on which no tax was due and this is used as the basis of the calculation. The rules are more complicated especially as prior to 21 March 1972 the spousal exemption did not exist. More information about how to deal with these types of cases can be found here 

Does the estate value affect the transferable Nil Rate Band?

No. The transferable nil rate band is based on the unused percentage of the first spouse’s nil rate band, not the size of the estate and there is no tapering. 

If clients sell their mothers house to pay for home care fees, i take it they would lose the residence nil rate band when the mother dies?

Not necessarily. If a property has been sold during lifetime, the downsizing provisions may apply. Provided assets of an equivalent value are left to direct descendants on death, and all the other criteria are met, the RNRB can still be preserved.

Should a client transfer main residence into trust for children and pay no market rent, the client will lose RNRB allowance?

The residence nil rate band can sometimes be claimed against a property that is subject to a gift with reservation but only where at the time the gift was made, the property was gifted to a lineal descendant. So, it would depend on the type of trust used as to whether the property would enter the descendant’s estate at the time of the gift. Normally with these types of arrangement this would not be the case and so no residence nil rate band could be claimed but it depends on the case. I would always direct an individual to a solicitor for legal advice if they are intending to place their main residence in trust as there are many potential pitfalls.

Please can you explain again how Equity Release can reduce the residence NRB

The residence nil rate band is only available on the net equity of a property. So if an equity release scheme creates a debt on the property and the net equity of the property falls below the level of the RNRB, then not all of the RNRB can used for the property.

If the property goes into a discretionary trust can the trustees appoint £175,000/£350,000 of the property to a direct descendant to then use the RNRB.

Generally no. The residence nil rate band requires the qualifying interest to be inherited on death, not appointed later by trustees. If however you are referring to discretionary trust created in the Will and within 2 years of death there is an appointment of the trust assets by the trustees to a direct descendant, it would be treated for IHT purposes as if the assets had been left to the descendant outright (s144 IHTA1984). In that event, the RNRB would be available as it would be treated as if the property had been closely inherited on death. 

On £2m and RNRB TAPER...Could a client theoretically gift a huge lump sum 1 day before they die, retain the RNRB and essentially have the same estate value?

Technically the estate value would reduce which is why you could get your RNRB entitlement back. It’s the net estate value that is used for the taper. But, from an IHT point of view, the gift would fail, use up nil rate band and potentially suffer 40% tax on the excess. Large gifts are a good way of getting the RNRB entitlement back but leaving it very late runs the risk of the gift not being able to be made due to lack of mental capacity or sudden death. 

If use BR and then gift this into a trust - even if you don't live 7 years, is RNRB retained if gift took assets below £2m

If the value of the estate on death is below £2 million, the residence nil rate band is not tapered. Making a lifetime gift whether business relief applies or not will reduce the estate value for the purposes of the taper. But, yes you can potentially invest in business relief assets for 2 years and once they are qualifying gift them into a trust to bring down the estate value for the RNRB taper. Remember however there are other conditions that need to be met for the relief to be available where death occurs within 7 years of the gift.

If considering foster children for RNRB. do you not have to have adopted them?

Leaving a property to a foster child would qualify as being “closely inherited” for the purposes of the RNRB. Adoption is not a requirement. See here.

Are pensions currently included in the estate value for the purposes of the Taper? And will this change post April 2027?

Most pension funds are currently outwith the scope of IHT but some pension values are included in the estate. Where the estate is entitled to the payment either under the terms of the scheme or the scheme member had a general power of disposal, the value is included for IHT and for the purposes of the RNRB taper. Most unused pension funds will be included in the estate calculation going forward. The only exclusions are dependant’s scheme pensions, trivial commutations LSDB, a dependants or nominees annuity that was bought alongside a lifetime annuity and death in service payments .

Alice's life interest brings the property value into her estate so what was the purpose of the trust? To ensure gift to Bob's heirs presumably?

When I decided to create this scenario that was the thinking behind it yes. The life interest ensures Alice can benefit, while the trust structure controls where the property ultimately passes. This is relatively common where there are children from previous marriages.

If the £50,000 gift had been made in a different year to the gifts to the Granddaughter's, presumably he could deduct the £3,000 annual allowance?

Yes. The £3,000 annual exemption is available for each tax year, so timing can make a difference. The annual exemption is applied in date order so the order gifts are made in a tax year can also determine which gift receives the exemption.

Surely, you would want to claim the gifts the granddaughter were out of disposable income (if possible)? That way you could apply 2*£3k exemption to the £50k?

I didn’t give any details on income and expenditure for Bob but yes, the normal expenditure out of income exemption may have been applicable in this case. If so then you are correct the annual exemption for the current tax year and the unused exemption from the previous year could have been used against the larger lump sum gift.

What is the purpose of 50% of a property going into a will trust on first death (likely using up NRB) if 100% of the of the property is assessed again on second death?

Whether leaving a share in a property to a trust uses up nil rate band on first death will depend on the type of trust used. A discretionary trust would use up nil rate band. Where the property is left to a trust in which the surviving spouse has a qualifying interest in possession, the inter-spouse exemption will apply and no nil rate band will be used.

There are many possible reasons for using a trust but normally it is about control and protection. If the intention is to have some control over what happens to the trust property on death of the surviving spouse then a trust can provide this whereas an outright gift might not. Property being held in trust also potentially offers protection from things like creditors in the event of bankruptcy etc.

Following up on my question - if the family home is owned a tenants in common, does that change things?

The above question was a follow-up to a question about leaving 50% of a main residence into trust on first death.

The key point to note is that in order to leave a share of a property into trust or to any other person (other than the joint property owner), then property must be owned on a tenants in common basis. If the property is owned on a joint tenancy basis, then the survivor will automatically inherit the property, regardless of what the will says. But note, it is possible that this can be changed with a deed of variation. 

Is this IDD qualifying? Thanks

Whether this counts as IDD will depend on your own firm’s CPD policy. The session was designed to be a technical update on how to calculate an IHT liability, with clear learning outcomes around identifying the estate, deducting liabilities and applying reliefs, but advisers should always log CPD in line with their firm and accreditation body requirements.

If I cant make next months webinar will there be a recording available ?

Yes. As with this Techy Thursday, the webinar will be recorded and made available on the M&G Tech Matters website. 

Please cover new dom/residency rules? thank you

Todays session was focused on the UK IHT calculation and how it relates to long term UK residents so we didn’t have time to cover all the changes. For IHT purposes a long term UK resident is someone who has been UK resident for 10 out of the 20 tax years in the tax year immediately preceding death. Where an individual is long term UK resident their worldwide assets are taken into account for UK IHT. For more information on how the new regime operates please see here.

With pensions now in estate from 2027, WOL is becoming popular but underwrtiing is increasingly strict so consider self-assuring, income into bond in trust each year?

Yes, it is true that WOL is not always affordable for all types of clients so gifting is definitely an alternative strategy worth considering. And it is important to remember that with WOL, you are not necessarily avoiding the IHT, you are kind of paying for it.  And premiums can become very costly if your client lives for a long time.

Is tapering applicable to chargeable lifetime transfers made more than 3 years before death, or is it only for failed potentially exempt transfers?

Taper relief can apply to both failed potentially exempt transfers and the additional tax on chargeable lifetime transfers in the 7 years prior to death. Its important to remember that if the gifts are covered by the nil rate band (including any transferable nil rate band) there is no additional tax due on the gifts, which means no taper relief. Taper relief reduces the additional tax payable on death, not the value of the gifts. 

If PRs create a Chargeable Event but surrendering a multi life Inv. Bond in the same tax year as the owner's death, is the income tax on the gain a liability to the estate?

If a bond continues on the owner’s death due to having another life assured or being a capital redemption bond, there is no chargeable gain on death. If the personal representatives then encash the bond, a chargeable event arises. A chargeable gain is income of the estate but it is treated slightly differently depending on whether it’s a UK or non-UK Bond. Either way the personal representatives will have reporting requirements in relation to the gain and there are tax implications for the resulting beneficiary who receives the proceeds. Importantly in these cases, top slicing relief is not available to the estate beneficiary so the personal representatives should consider assigning segments of the bond to the beneficiary instead. The process for gains arising in the hands of the personal representatives in thes types of situation is covered in HMRC’s IPTM3240.

Client gifted her property to her son & no longer lives there. She understands gift is a PET but can previous home still qualify for RNRB?

Yes, potentially. Provided it was her former residence and the downsizing conditions are met, the residence nil rate band can still apply.

Why does baseline calculation (charitable gifts to asses if 36% rate on estate) not include MRNRB?

That’s simply how the legislation is drafted. The baseline amount is calculated ignoring the residence nil rate band.

What strategies would you suggest now for a client with a £7m inherited SIPP, ahead of the IHT changes in April 2027?

As I mentioned in closing, this is where early planning is key – reviewing nominations, considering charitable legacies, staged withdrawals and the wider family balance sheet.

Any pointers where the beneficiary spouse is a non uk national ?

Unfortunately, this isn’t really our area of expertise as we focus on long-term UK residents. Cross-border tax planning will almost certainly need a specialist involved.

who do we contact for specific requests for IHT at your office? Is there an email?

Advisers should raise specific IHT queries through their usual M&G contact or you can submit a question through “Ask an expert” on the Tech Matters website.

Can you please share a link to the case studies available on your website?

All our technical material, including case studies are available on the M&G Tech Matters website.

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