Admittedly, it takes a (fairly small amount of) time to set up, and there is a (fairly small amount of) paperwork involved, but holding such a policy in trust means that on death the funds can be released immediately without the need to wait for probate, making the administrative work required seem certainly worthwhile.
In addition, the proceeds will be outside the estate for IHT purposes.
Let us consider an example of a single man or woman (see table two), with half their estate held in property, as shown in column A.
In this example, if they take no action, their IHT liability would be £130,000.
If they followed the IHT planning listed in column B – gifting their securities, around two-thirds of their cash to trust and writing their insurance policies into trust, but taking no action with their property – their IHT liability could be reduced to nil, as shown in column C.
They could still retain a varying degree of access to the assets in trust, depending on the type of trust chosen, and they would also be able to specify to trustees in a letter of wishes how they would wish the assets to be distributed.
Table two. Example scenario for IHT planning by asset class
| A | B | C |
| Assets of estate | IHT planning | Remaining assets in estate |
Securities | £100,000 | £100,000 gifted to trust seven years before death | £0 |
Cash | £200,000 | £125,000 gifted to trust seven years before death | £75,000 |
Insurance policies | £100,000 | Written into trust | £0 |
UK residential buildings | £400,000 | No action | £400,000 |
Total estate value | £800,000 | | £475,000 |
Nil rate bands applying | Nil rate band £325,000 Residence nil rate band £150,000 | | Nil rate band £325,000 Residence nil rate band £150,000 |
IHT liability | 40 per cent of £800,000 - £475,000 = £130,000 | | 40 per cent of £475,000 - £475,000 = Nil |
Is there enough time left?
Clearly, the most effective IHT planning takes place by gifting at least seven years before death.
A look at the Office of National Statistics life expectancy tables (see table three) shows that, on average, those in the 65-74 age group should still have plenty of time to plan ahead, with average life expectancies for men and women considerably above the seven years required to remove a gift from the estate and providing the opportunity to recycle the nil rate band at least once more (14 years), possibly twice (21 years), depending on the age of the client.
Table 3. UK life expectancy by age
| Life expectancy at age (average number of years that person is expected to live thereafter) |
Age | Male | Female |
65 | 20.8 | 23.0 |
66 | 20.0 | 22.1 |
67 | 19.1 | 21.1 |
68 | 18.2 | 20.2 |
69 | 17.4 | 19.3 |
70 | 16.6 | 18.4 |
71 | 15.8 | 17.6 |
72 | 14.9 | 16.7 |
73 | 14.2 | 15.8 |
74 | 13.4 | 14.2 |
Deliberate deprivation of capital
Unforeseen health events can impact the best-laid plans. Advisers should be aware of the rules regarding deliberate deprivation of capital.
In the event of a significant deterioration in health, it may be a natural wish to give away assets to family or friends at an increased rate.
However, should a person then incur significant social care bills, and should their estate then be reduced so much that additional state support is needed, the local authority may decide to try and retrieve some of the gifts if it deems them to have been given away in order to avoid paying for care fees.
Interpretation of the rules varies and as a result several cases have ended up in the courts.
