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Inheritance tax (IHT) and Estate Planning

The biggest policy here has been that to increase the nil rate band (NRB) to £1m for couples.  The problem has arisen because IHT was only ever meant to be a tax on the very wealthiest in society; but the increase in house prices has resulted in many households with moderate wealth falling within the charge.  As these are typically families who have worked hard and paid tax throughout, most feel particularly bitter about taxed amounts being subject to a further tax upon their death.

The Government’s solution is the ‘Main Residence Nil Rate Band’ (MRNRB), as set out below.  Its effect is to remove estates from the charge to IHT where this is largely a result of an increase in house prices, whilst avoiding the accusation that it benefits those who IHT is meant to catch – the very wealthiest – by removing the MRNRB for estates valued at over £2.7m.

With regards to achieiving fairness, there is the closing of the loophole of pilot trusts – a method of taking large assets out of people’s estates.

The whole nil rate band situation!

Main residence nil rate band

The key features of the MRNRB are as follows:

–    it will refer only to the value of the main residence;

–    it will only be available with reference to the transfer of the main residence on death;

–    the transfer must be to direct descendants (i.e. children, grandchildren, etc);

–    the limit will be as follows:

–    for 2017/18, £100,000;

–    for 2018/19, £125,000;

–    for 2019/20, £150,000;

–    for 2020/21, £175,000;

–    the amount of the MRNRB will be the lower of the above and the value of the main residence;

–    to the extent that the MRNRB is not utilised by the first spouse to die, it can be transferred to the surviving spouse;

–    in order to combat concern that this will discourage individuals from down-sizing, the MRNRB will be available where a taxpayer downsizes or ceases to own a house, provided this takes place on or after 8 July 2015 and an equivalent amount is transferred to direct descendants;

–    if a net estate exceeds £2m, the MRNRB is reduced by £1 for every £2 of excess.

The nil rate band

The NRB will remain at £325,000 until at least the end of 2020/21.  This should be considered separately from the MRNRB.

Conclusion and plan of action

Clients are already asking me about “this £1 million allowance that we will all get, as the Conservatives promised”.  Unfortunately, it is not as simple as this.  Obviously, they worded it in such a way to make it as appealing as possible and in cases where there is a married couple with an estate of £2m or less including a valuable property, up to £1m of the estate will not be subject to IHT.  However, it is clearly not as simple as that.  That said, the MRNRB does achieve their aim of removing most from the charge to IHT as a result of house prices, whilst still ensuring that those who they consider should be subject to IHT still are.

It is recommended that people work out their current IHT exposure following the recent changes and consider carrying out planning to reduce this further.

Pilot trusts


It used to be possible to create several trusts on death, each of which would have its own NRB.  Typically, this would be done as follows.  Firstly, an individual would set up, say, five trusts on consecutive dates, each with £10 therein.  The first trust would have a NRB of £325,000, the second would have £325,000 less £10, and so on.  These were not added to during the individual’s lifetime (if these were added to during the next seven years there would not be any tax benefits of doing so – as soon as over £325,000 was settled, an IHT charge of 20% would apply), but on death.  The testator would leave, say, £300,000 in his will to each trust.  The NRBs of each trust would remain the same, but the net impact would be that five trusts would exist, each with a full NRB.

This planning was typically used to transfer large assets to several individuals to avoid the requirement for it to be divided and sold.  It would allow the asset to be held in a trust without IHT charges arising.  (Note, there was no reduction of IHT with regards to the testator’s estate.)


The Government is introducing legislation to ensure that it is not possible for individuals to create such trusts going forward.  Instead, at the point where amounts are settled on the same date to different trusts, each trust will have a proportion of the available NRB.  In this way, collectively they will only have one NRB between them.

There was a danger that this was going to go further by stating that all trusts created by the same settlor would share a NRB.  Thankfully, this was not introduced.

In addition, the legislation is flexible enough to allow people to add to several trusts on the same day for the purpose of ensuring there are liquid funds to pay, for example, income tax or trustees’ fees: up to £5,000 can be settled on various funds on the same day without the anti-avoidance applying.


The legislation will not apply where the pilot trusts and the will were executed before 10 December 2014 and the death takes place before 6 April 2017.  Therefore, if the trusts and wills were executed before 10 December 2014, they should be left in place until 6 April 2017; if the testator is still alive at that point, the wills should be amended accordingly.

Secondly, it will still be possible to settle trusts every seven years and have a full NRB.

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