Navigating the UK’s Inheritance Tax Landscape After the Autumn 2024 Budget

Example Gifting and Inheritance Tax Planning Scenario

Let’s look at an example of how a successful family with a £5 million estate could use some of these inheritance tax strategies:

John and Jane, both aged 70, have an estate valued at £5 million. They have 2 children (aged 45 and 42) and 2 grandchildren (aged 12 and 8).

John and Jane want to leave their entire £5 million estate to their 2 children. However, while they are still alive, they would like to gift a debt-free buy-to-let property (worth £700,000) into a discretionary trust for the benefit of their 2 grandchildren. The income from this property will be used to support the grandchildren’s education.

In this example, it means the full £700,000 value of the property counts towards their lifetime Potentially Exempt Transfer (PET) allowance.

Since John and Jane are a married couple, they each have a £325,000 PET allowance. This means they can collectively gift up to £650,000 every 7 years without incurring an IHT charge.

By gifting the £700,000 property, John and Jane have used up the full £650,000 of their joint PET allowance.

They would either need to wait 7 years before being able to make another large gift to the trust without triggering an upfront 20% IHT charge on the amount over £650,000.

Or, they gift the full £700,000. By utilising their £6,000 annual gift allowance (£3,000 each) for the tax year, plus any unused £6,000 annual gifts from the previous year, it would result in an excess gift of £50,000 is made into trust, taxed at 20% (£50,000 – £12,000 x 20% = £7,600 or a 1% tax on the total gift).

So in summary, the £700,000 property gift has maxed out John and Jane’s joint PET allowance for the next 7 years. And after 7 years, they’ll have another £650,000 of PET allowance available to potentially gift again.

By gifting the £700,000 property into a trust, John and Jane have removed this asset from their taxable estate – saving 40% tax assuming they both live 7 years. Assuming the property grows in value over time, this could result in substantial additional IHT savings for their children/grandchildren down the line.

Additionally, John and Jane can use their £6,000 annual gift allowance (£3,000 each) to make additional gifts to their children and grandchildren every year, further reducing the value of their taxable estate.

There will also be other tax considerations – such as Capital Gains Tax on the disposal of the property into trust (if there is a significant CGT position they would need to declare on their tax a disposal for CGT on personal tax forms and then hold over in the Trust), as well as Income Tax for the trust to pay on rental income received (collect income and pay all bills via the trust – distribute the income to the grown up children to pay for education, and claim back the tax subject to their own marginal tax rate).

With careful planning and utilisation of the available exemptions and allowances, John and Jane have been able to significantly mitigate their potential inheritance tax liability and ensure more of their wealth is passed on to their loved ones.