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Inheritance tax planning


Inheritance tax planning

What do independent pharmacists need to know when it comes to inheritance tax? Vinku Shah provides an insight...

Inheritance tax (IHT) is levied on a person’s estate when they die, and certain gifts made during an individual’s lifetime. Certain assets will have appreciated and some depreciated in value over time and with proper inheritance tax planning, there are opportunities for tax saving. It may be a good time to gift assets that have fallen in value or even stand at a capital loss.

Below we summarise on certain gifts that could potentially be given tax-free. 

Annual exemption

An amount of £3,000 per tax year (6 April to the following 5 April) may be given by an individual in assets or cash without an IHT charge. Any unused annual exemption may be carried forward, one year only, for use in the tax year that immediately follows. If you gift more than £3,000, you'll pay inheritance tax only if you die within seven years of giving.

Gifts between spouses

Gifts between UK-domiciled spouses during their lifetime or on death are exempt from IHT. Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and result in a substantial tax saving.

Small gifts

Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift. Do bear in mind that a person can only receive £3,000 worth of tax-free gifts i.e. up to the annual exemption.

Wedding gifts

Cash gifts can be given provided they are made before the wedding and the wedding actually happens and have to be:

- given to a child and worth less than £5,000

- given to a grandchild or great grandchild and worth less than £2,500

- given to any other relative or friend and worth less than £1,000

Inheritance tax is charged at 40 per cent on any gifts valued over £3,000 that are given less than three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale, which is known as ‘taper relief’.

Years between gift and death

     Tax paid

less than 3


3 to 4


4 to 5


5 to 6


6 to 7


7 or more










If the value of the asset being transferred is lower than it was when acquired and the transferor dies within seven years, the IHT charge would be much less than if it had been transferred before the at a higher value. Therefore, you may want to consider transfers of assets that have devalued since acquiring them, but you expect them to appreciate as any future increase in value will not affect the position of the transferor.

You could be entitled to a IHT rebate if you have inherited listed shares and securities, UK government stock and holdings in unit trusts and the value at the time of sale of these qualifying investments is lower than the probate value, provided they are sold within 12 months of the date of death.

This also applies to the value of land and buildings provided these were sold within 4 years of the date of death but the loss in value must be at least the lower of £1,000 or five per cent of the probate value. In both cases individual circumstances should be considered carefully and whether any IHT rebate would be worth the potential capital appreciation in future years.

School fees

A measure that is proving increasingly popular to those with grandchildren in private education is to contribute towards their school fees. This works well on various levels; grandparents obtain the benefit of some IHT planning by reducing the value of their estate and parents have more disposable income as a result of needing to pay less in school fees

One way of achieving this could be to utilise the £3,000 annual exemption. Gifts up to this value may be made every year – by each grandparent – completely free of IHT. This amounts to a fairly substantial sum over the course of a child’s education.

For those grandparents that wish to contribute above or in addition to the annual exemption, regular school fee payments may be made from their income. Such gifts will be exempt for IHT purposes provided that they come from surplus income and do not negatively impact on their normal standard of living.

Where insufficient income is available to make regular contributions, school fee payments could be made from capital. Such gifts would be potentially exempt transfers (PETs): free from IHT provided that they were made at least seven years prior to the death of the transferor(s). A discounted rate of IHT would apply where death occurred between three and seven years after the gift.

Those grandparents that are able to make a contribution towards their grandchildren’s school fees could reduce the proportion of their estates that may be subject to IHT at 40 per cent. With private school fees only set to increase, there has never been a better time to contribute and benefit from IHT planning.

Setting up a trust

A final possibility to consider where grandparents are able to offer a lump sum gift would be to set up a trust for the purposes of paying school fees or other educational costs. Depending upon the type of trust selected it is possible to gift assets but still retain an element of control, which is often desirable where younger children are concerned or where there are difficulties between a child’s parents.

Up to £650,000 may be gifted as a couple with no immediate charge to IHT and, provided that the settlors are still alive seven years after making the gift into trust, the transferred assets will not be included in their estate.

It is crucial to review the value of your estate annually so that you can plan to distribute it tax efficiently, especially larger assets as you want to avoid a tax burden to fall on those you leave behind and may be forced into selling an asset that could have been in the family for generations just to pay the IHT that has arisen.


Vinku Shah FCCA is a chartered certified accountant and partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or



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