Medical Money Management > Knowledge Centre > Estate planning – too important to put on hold

Estate planning – too important to put on hold

Estate planning is usually not a subject that attracts immediate attention, but the introduction of the new Main Residence nil-rate band in April 2017 and the abolition of a proposed large increase in Probate Fees has given us much food for thought.

Estate Planning requires you to consider what will happen on your death, hardly something most of us rush to contemplate. Consequently, estate planning often becomes, and all too often remains, a ‘do-it-tomorrow task’. Then it could suddenly become all important…or it might be too late. After all, accidents do happen.

Think about what arranging your estate planning now achieves:
  • You decide on the choice of beneficiaries  If you do not set out in a will whom you wish to benefit from your estate, then the State will do it for you. The results are not always what you would expect or want and can create unnecessary tax liabilities.
  • You decide what goes to whom  You might want to leave a particular item to a particular person. Without estate planning, those wishes may not happen.
  • You decide the structure  Leave it to the State to distribute your wealth and normally anyone aged 18 or over will receive their inheritance outright. In some families, that will not be an issue, but in others placing some constraints on how an inheritance is handled could be essential.

The Inheritance Tax (IHT) regime

The introduction of the Main Residence nil-rate band (see below) has created the opportunity for a long overdue increase in the available IHT allowances upon death, but there are strings attached and complex rules to understand.

At this point it is probably helpful to refresh our minds of the main IHT transfer and exemption limits available.


Transfers between spouses and civil partnersThese are exempt from IHT, provided the recipient is domiciled in the UK. Non-domiciled aspects are beyond the scope of this guide, but if you are affected you should know the rules have recently changed.
The transferable nil-rate bandTo the extent that one spouse or civil partner does not use their full nil-rate band at death, it is transferable to the survivor’s estate. The precise rules are complex but the effective result is that a couple currently has a combined nil-rate band of up to £650,000 (£325,000 x 2). The transferability means that there is no need to ensure that the first of a couple to die uses their nil-rate band as was the case before transferability was introduced in 2007.
Main residence nil-rate band (New for 2017/18)An additional nil-rate band, initially of £100,000 has been introduced to set against the value of your home provided it is bequeathed to a direct descendant. The band will be increased by £25,000 a year until 2020/21, when it reaches £175,000. Like the existing nil-rate band, any unused portion will be transferable between spouses and civil partners but unlike the existing band it will be subject to a 50% taper if your estate is worth more than £2m. Special rules will deal with downsizing or selling up completely e.g. on moving into a care home.
Annual exemptionsThere are three annual exemptions, each of which works on a tax-year basis:

  • The most widely known is the £3,000 annual exemption, which can cover any type of lifetime gift, in whole or part.
  • The small gifts exemption covers any number of outright gifts of up to £250 – useful if you have plenty of grandchildren.
  • The least well known is the normal expenditure gift. Regular gifts may be exempt from IHT if you make them out of your income and they do not reduce your standard of living.
Charities, etc.Gifts and bequests to UK charities, political parties and for the public benefit are exempt from tax. Charitable bequests can also result in the IHT tax rate on your estate being cut to 36%, provided that overall they amount to at least 10% of your net estate.
Wedding giftsWedding gifts are exempt, but subject to very modest limits (no more than £5,000) based on the relationship between the donor and the bride/groom.
Business and agricultural reliefsBusinesses and agricultural property can benefit from generous IHT reliefs, provided certain conditions are met:

  • 100% relief is given for shares in unlisted trading companies (including those listed on the Alternative Investment Market (AIM)), sole trader or partnership business interests, owner-occupied farms and tenanted farms where the lease started after 31 August 1995.
  • 50% relief applies to property and other assets owned by an individual and used by a trading company that they control, or by a partnership in which they are a partner. The 50% relief also applies to tenanted farmland where the lease started before 1 September 1995.


Taper relief

The amount of tax payable at death on a gift that was made within the previous seven years is subject to a sliding scale. For example, the tax payable on an outright gift made five and a half years before death is reduced by 60%.

To clarify, the taper applies to the amount of tax, not the value of the gift, so a gift that attracts no tax cannot benefit from taper relief but will still be treated as being in your estate at death.

Tax avoidance legislation has steadily increased over the years. For example, the ‘gift with reservation’ rules would prevent you making any IHT savings by putting your home in your children’s names and then continuing to live there rent- free.

Example – The new main residence nil-rate band in practice

Jack and Jill each had an estate of £1.2m when Jack died in June 2020. His will left everything to Jill, who died eight months later. Thus Jill inherited 100% of Jack’s nil-rate band and, as his estate was under £2m, 100% of his main residence nil rate band of £175,000.

However, on Jill’s death her estate was worth £2.4m, which brought the tapering rule came into play. Instead of having a total main residence allowance of £350,000 (2 x £175,000), the allowance available to her estate was therefore reduced by £200,000 (£400,000/2) to just £150,000.

If Jack had used his £325,000 nil-rate band on first death to make gifts to beneficiaries other than Jill, there would still have been no IHT on his death but Jill’s estate would be correspondingly smaller on second death. As a result, the available main residence allowance would have been £312,500 (£350,000 – £75,000/2).

As you can see, there are many traps that could result in your estate paying more IHT unless advice from an expert is taken.

Get to grips with your Estate Planning

With estate planning in place, you will have addressed these important issues rather than left them on permanent hold. However, like all aspects of financial planning, your estate planning will need regular review and specialist financial and legal advisers to guide you through the maze.

At MMM we understand that this is a difficult and complex task to undertake, but with an appraisal of your main options  and clear advice on the best planning steps we can make it is a very beneficial exercise.

You might often see quotes to the effect that IHT is a ‘voluntary or optional tax’ hopefully with our support and advice we can fulfil that pledge.