How to navigate proposed IHT changes post-Covid

Discounted Trust plans have two distinct elements, the first providing an ‘income’ whilst the other is either a chargeable lifetime transfer or a potentially exempt transfer depending on the type of Trust used.

This will provide some immediate relief from IHT and total relief on the value of the investment after a period of seven years.

This is a valuable way of making a gift of capital while retaining a fixed income stream for example 5 per cent of the capital gifted per year throughout an individual’s lifetime.

However, discounted trusts are inflexible, as future income requirements must usually be determined at the outset.

Insure against the liability

If an individual does not want to give away assets whilst alive, nor invest in IHT efficient assets, an alternative is to invest in life cover, which can pay out an amount equal to an estimated IHT liability on death.

However, it is vital that the policy is written into trust, so that the amount paid out is not added to the estate and liable to be charged to IHT itself. This can either be done via:

• term policy – which runs for a fixed number of years (in which case the subject would have to die within the term of the policy for this plan to be effective)
• whole of life policy – which pays out regardless of how far in the future that is.

Policies written on a joint life second death basis, paying out on the death of the last survivor, can be a cost efficient way of dealing with an IHT liability.

Where asset protection is not an issue, making outright gifts is a simple and common way to reduce the value of an estate and therefore IHT charges.

Tax-efficient wills

A will sets out what happens to the assets in an estate after the death of the owner.

It allows individuals to decide which of their loved ones should inherit these assets and in what proportion.

Without a valid or up to date will, the assets will be distributed according to the rules of intestacy, which means the estate might not be divided in the way the deceased would have wished.

For married couples, any existing will is automatically revoked.

Individuals can also elect to make efficient gifts to charity in their Will. If they leave a bequest to charity of 10 per cent or more of the value of their net estate, the executors may be entitled to pay a reduced death rate of IHT of 36 per cent, rather than the normal 40 per cent.