1. Holistic Inheritance Tax Planning
Wealth Protection
Holistic Inheritance Tax Planning

2. Agenda and Learning Objectives
Residual estate liability
Potentially taxable gifts
Temporary liability
Residence Nil-Rand Band (RNRB)
By the end of this session, you will understand:
How to calculate the potential tax on gifts made within 7 years of death, and the solutions available.
The impact of the value of a gift made within 7 years of death falling back within the estate, and how to protect against it.
How to calculate - and provide ongoing management of - the residual IHT liability on an estate.

3. £ Inheritance Tax (IHT)
6 months IHT payment is due no later than 6 months after the month of death1
£4.7 billion The amount of IHT receipts in
The future IHT receipts are set to rise to £5.7 billion by 20223
Source:
Source: Office for Budget Responsibility Economic & Fiscal Outlook – Nov 2016

4. When is IHT payable?
IHT levied if client dies with estate > £325,000 / within 7 years of making a gift.
Selected gift exemptions
Husband / wife / civil partner (if both UK-domiciled).
Annual exemption - £3,000 total.
Wedding - £5,000 (child) / £2,500 (grandchild) / £1,000 (anyone else).
Maintenance – e.g. ex-husband / wife / civil partner.
‘Normal expenditure out of income’
Christmas, birthday and anniversary presents.
Life insurance policy premiums.
Regular payments into a savings account.

5. Nil-Rate Band from April 2017
From 6 April 2017, main-residence NRB (‘Family Home Allowance’) added to existing NRB:
Estates > £2m lose some / all of the allowance - tapered by £1 per £2 over threshold.
Tax Year
Single Person
Married / Civil Couple
NRB
FHA
Total
£325,000
£100,000
£425,000
£650,000
£200,000
£850,000
£125,000
£450,000
£250,000
£900,000
£150,000
£475,000
£300,000
£950,000
£175,000
£500,000
£350,000
£1m
We will ignore the effect of the RNRB for purposes of case studies / calculations in this presentation.
Don’t ignore IHT liability until you don’t know when your clients will die.
Effect a whole of life insurance policy for current liability, and reduce it each year.

6. 1. Residual Estate Liability
= Value of estate, less full NRB, x 40%.
e.g. estate = £1m, NRB = £325,000, IHT Liability = £270,000 (£675,000 x 40%).
Solution is whole of life (WOL) insurance - JLSD for married couples.
This will generally be the starting point for IHT planning.
As any gifts are made (and protected), WOL sum assured can be reduced.
JLSD for married couples as no IHT liability on transfers between spouses.
For JLSD - if one life is medically uninsurable, we can consider underwriting the policy solely on the other life.

7. Audience Question
With respect to Potentially Exempt Transfers (PETs), what does taper relief reduce?
a) The rate of tax on failed PETs
b) The value of the PET
c) The value of the residual estate
Answer = a

8. 2. Potentially Exempt Transfers (PETs)
A gift not otherwise exempt is known as a Potentially Exempt Transfer (PET).
‘Taper relief’ reduces the rate of tax on failed PETs made 3 to 7 years before death.
N.B. Taper relief reduces the rate of tax – NOT the value of the gift.
Recipient of gift will have to pay IHT if:
Donor gave the gift less than 7 years before they died, and
They had gifted at least £325,000 in last 7 years of their life.

9. 2. Taper Relief Years Value of Gift Taper Relief Tax Rate 0-3 100% 0%
40%
3-4
20%
32%
4-5
24%
5-6
60%
16%
6-7
80% 8%

10. 2. Cover for Potentially Taxable PETs
Solution 1 – Gift Inter Vivos policy
Bespoke policy designed specifically to cover the IHT liability on failed PETs.
Sum assured reduces by 20% per year from end of year 3.
Initial sum assured = potentially taxable value of PET (40% of value of PET > available NRB).
NOT 40% of the value of the PET itself (unless entire PET is potentially liable to IHT).
e.g. £475,000 gift:
£325,000 NRB available
£150,000 potentially taxable
Sum assured = £60,000

11. 2. Cover for Potentially Taxable PETs
Solution 2 – 5 x Level Term policies
May be more cost effective solution:
e.g. £475,000 gift:
LTA market more competitive than GIV market
£325,000 NRB available
£150,000 potentially taxable
£2pm discount for additional covers (i.e. £8pm)
Sum assured = £60,000
£60,000 ÷ 5 = £12,000
Value of each policy = potentially taxable value of PET; x 40%; ÷ 5.

12. 2. Cover for Potentially Taxable PETs
Year / LTA Term
Tax Rate
Potential IHT
LTA Sum Assured 3
40%
£60,000
£12,000 4
32%
£48,000 5
24%
£36,000 6
16%
£24,000 7 8%

13. 3. Temporary IHT Liability
Full value of PET is added back to estate if donor dies within 7 years,
Value of a ‘failed PET’ being added back = temporary (7-year) IHT liability.
Solution is 7-year LTA: value of gift > NRB remaining after gift x 40%.
e.g. £400,000 estate, £100,000 gift:
£300,000 net estate after gift
£25,000 NRB remaining
£100,000 - £25,000 = £75,000
£75,000 x 40% = £30,000
Q1 – 7 year LTA is also cheaper than equivalent amount of WOL. Can reduce any existing WOL cover.
Q. Why not just Whole of Life (WOL) cover instead?
A. Gift falls out of account after 7 years - LTA more appropriate.
Q. Why not Joint-Life 2nd Death for married couples?
A. JLSD policy won’t pay out unless both die within 7 years.
Q2 – The funds are not required until death of the 2nd life, but the problem is created by death of the 1st life.

14. Enterprise Investment Schemes (EISs)
A tax-efficient / high-risk investment vehicle.
100% IHT relief once investment held for 2 years.
Until then IHT liability is 40% of investment:
e.g. £200,000 investment = £80,000 liability
Clock starts ticking once shares are received, NOT from date of application.
Arranging an EIS can take months - at least a 3-year LTA is required.
Shares can only be issued once the company is able to receive payment for them.

15. Business Property Relief qualifying schemes
BPR available on investments in qualifying businesses:
Shares in companies not listed on a stock exchange
Shares in companies listed on AIM
Interest in qualifying business, e.g. a partnership
100% IHT relief once investment held for 2 years.
Until then IHT liability is 40% of investment:
e.g. £150,000 investment = £60,000 liability
Clock starts ticking straight away - 2-year LTA suffices

16. Inheritance Tax Planning - Summary
Start by covering the ‘Residual Liability’
Current value of estate less full NRB x 40% - Whole of Life.
Cover potential liability on gifts / investments as made.

17. Inheritance Tax Planning - Summary
Gift - if value of PET + other chargeable transfers < available NRB
7-Year LTA. Reduce WOL
IHT-friendly investments
2 or 3-Year LTA (investment x 40%)
Reduce WOL already in place
Gift - if value of PET + other chargeable transfers > available NRB
5 x LTAs / Gift Inter Vivos on potential tax (PET > NRB x 40%)
AND 7-Year LTA. Reduce WOL

18. Product considerations
Make sure the product fits client’s needs
Ensure it has mid-term flexibility:
Increase cover (GIOs)
Reduce cover with no age-rating
Split policy on divorce
Add new life on marriage
Independent research - CI Expert / F&TRC
Look for valuable extra features:
Online trusts (no paperwork)
Best Doctors™
No ongoing duty of disclosure
Check for common exclusions:
Drug & alcohol abuse
War / terrorism / civil commotion

19. Cover for non-UK residents
We can now consider cover for non-UK residents - both British citizens (expats) resident almost anywhere in the world, and also foreign nationals resident in over 40 countries.
This is subject to the policy owner:
having a GBP bank account in the UK, and
a financial liability in the UK (such as IHT) for which the cover is required

20. Examples of AIG policy features
Splitting policy on divorce
Joint policy can be split into two single policies
Up to previous joint-sum assured
New premiums are both based on original ages
No further underwriting on either life
Adding new life on marriage
Single-life policy can be converted into joint policy
No further underwriting on first life
Premium for first life based on original age