Objective: To mitigate Tom and Sally’s inheritance tax liabilities whilst maximising the value of the estate passed to Hannah

Question 1

Comment on their current situation in the context of inheritance tax and
intestacy. (11)

Answer 1

Tom and Sally are not married
 Which means they will not benefit under the laws of intestacy as common law
partners are not recognised
 If they die without making wills, other than the jointly held assets, on 1st death solely
owned assets would go directly to Hannah
 They are treated as two single people
 If they were married, under the laws of intestacy, the surviving spouse would receive
all personal belongings, the first £250,000 and half of any surplus. The other half
would go to Hannah.
 Each can use their nil rate band on their death
 As things stand, they cannot use both Residence Nil Rate Bands (RNRB) currently
£125,000,
 even though they have a direct descendent to leave their property to
 Their property is held as joint tenants, so although goes to the survivor on first
death, will form part of the deceased person’s estate
 Their pension funds will not form part of their respective estates
 If they die within 5 years of each other quick succession relief will be available

Question 2

Detail and justify the recommendations you would make in respect of
mitigating IHT, whilst maximising the value of the estate passed to Hannah,
assuming they remain unmarried.(21)

Answer 2

Both of them to use the annual exemption of £3,000
 For the current tax year, and previous tax year if not already used
 Make regular gifts from income using the normal expenditure out of income exemption
 Use the Small gifts exemption
 Make gifts to their Hannah beyond the gift they are already making her which should be
exempt under the education and maintenance exemption
 To ensure this falls outside of his estate
 As all of the above will reduce the taxable estate immediately
 Make outright gifts / PETs / CLTs within the nil rate band
 This will reduce the estate after seven years
 A seven-year level term assurance policy could also be used to protect the IHT resulting
from any gifts within the nil rate band,
 And a gift inter vivos policy could be set up to cover the tapering IHT on any gifts that
exceed the nil rate band
 Effect whole of life policies, in trust for Hannah to fund any IHT liability
 Premiums should be classed as normal expenditure/part of annual gift allowance
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 Policy to include indexation option
 To cover increases in the estate
 They could both purchase EIS or AIM listed shares to further reduce their estates after 2
years
 Compatible with their ATR
 Both to make wills as soon as possible to reflect their intended wishes
 Consider changing ownership of their home to tenants in common so on 1st death the
deceased share either goes to Hannah directly (who will then own the home with the
survivor) OR to an interest in possession trust with Sally as the life tenant (so she can
stay in the home) and Hannah as remainderman
 Both routes should ensure availability of both RNRBs
 If an interest in possession trust is used then the value will form part of the second to
die’s estate

Question 3

Explain in detail how getting married would work to significantly reduce the
potential IHT on their joint estate. (13)

Answer 3

The IHT Nil Rate Band (NRB) is transferrable between spouses
 Any unused proportion of the NRB of the first to die is transferred to the survivor
 In addition, the Residence Nil Rate Band was introduced in 6 April 2017
 And for 2018/19 is £125,000
 Where residential property is left directly to direct descendants
 RNRB increases by £25,000 per year until 6th April 2020
 When maximum is £175,000
 Is also transferable on death in the same way as the standard NRB
 As their estate is currently under £2,000,000, they will benefit from the full RNRB
(over £2m, it is tapered at a rate of £1 for every £2 over the £2m threshold)
 Gifts made during lifetime are not included in the value of the estate for this purpose
 But if gift made in the seven years prior to death, they are regarded as using up part
of the nil rate band at death as they are failed PETs
 This means that for 2018/19, a married couple could have a joint estate of up to
£900,000 and pay not IHT
 Also, until they make wills, getting married would also ensure each benefits under
the laws of intestacy on first death

Question 4

Explain the use of life assurance policies in connection with IHT planning as it
relates to Tom and Sally’s situation: (7)

Answer 4

They could purchase single life whole of life policies
 With a sum assured equivalent to their individual IHT liability
 The sum assured indexed to keep pace with any increase in the value of their liability
as the estate potentially increases in value over time
 The policies can be placed in trust to Hannah
 This means that it is paid outside of Tom and Sally’s estates and is paid quicker and
with no IHT liability

 The IHT annual exemptions for each of them may be available so the premiums will
be exempt
 Tom can also use the normal expenditure out of income exemption

Question 5

What factors would you take in to account when considering the suitability
of whole of life policies to cover Tom and Sally’s potential inheritance tax
liabilities (8)

Answer 5

Financial strength of the provider
 The premiums for their relatively young age
 Basis available, maximum, standard, etc
 Whether premiums are reviewable, and when
 Is the cover index-linked?
 Other options available, such as critical illness,
 Choice of funds
 Waiver of premium?