WAE 6 - Tax planning

Question 1

When are loans not deductible for IHT purposes?

Answer 1

• Loans for BPR/APR/Woodlands Relief assets – Deduction is applied to the relievable asset rather than the chargeable estate.
• Loans not repaid from the estate – Only deductible if actually repaid.
• Loans used to acquire excluded property.
• Loans funding foreign currency accounts.

Question 2

When does GROB apply to a gift?

Answer 2

• The donor still benefits from the asset.
• The donee does not take full possession before the 7-year period.
• The donor continues to use the asset (e.g., living in a gifted house rent-free).

Question 3

What happens if a GROB still exists at death?

Answer 3

The asset remains part of the donor’s estate for IHT.

Question 4

How should BPR/APR assets be gifted for tax efficiency?

Answer 4

• Do not gift to an exempt beneficiary (e.g., spouse/charity), as this wastes relief.
• Consider gifting via a discretionary trust, where relief applies, but the assets remain outside the spouse’s taxable estate.*

Discretionary trusts can be a useful planning tool:

• If structured correctly, the gift of BPR/APR-qualifying assets into the trust can still attract the relief (so the gift does not trigger a 20% lifetime IHT charge).
• The assets are then held in trust, outside anyone’s personal estate—including the spouse’s—so they don’t increase their eventual IHT exposure.
• This preserves flexibility (trustees can choose who benefits) while still making full use of available reliefs.

Question 5

Who are exempt beneficiaries for IHT?

Answer 5

• Spouse/Civil Partner – 100% exemption.
• Charities – Fully exempt.

Question 6

What is the impact of specific gifts vs. residuary gifts to exempt and chargeable beneficiaries?

Answer 6

• Specific gift to an exempt beneficiary – No IHT applies; only the residue is taxable.
• Specific gift to a chargeable beneficiary “subject to tax” with residue to exempt beneficiary – IHT is deducted from the gift
• Specific gift “free of tax” with residue to exempt beneficiary – Grossing-up applies and tax is paid from other funds

Question 7

How can double grossing-up be avoided?

Answer 7

• Avoid gifting chargeable amounts “free of tax”.
• Clearly structure will provisions to prevent unnecessary IHT increases.

Question 8

How can NRB planning benefit married couples?

Answer 8

• NRB = £325,000
• Spouse can transfer up to 100% of unused NRB to surviving spouse
• Max total NRB = £650,000

Question 9

Why is NRB planning crucial for unmarried couples?

Answer 9

• No spouse exemption, so IHT applies on both deaths.

Question 10

What is the solution for NRB planning in unmarried couples?

Answer 10

Use a discretionary trust at first death to reduce the survivor’s estate.

Think of the NRB like a one-time tax-free envelope. You can use it to give away £325,000 without tax. If you give that money to your partner directly (unmarried), it ends up back in the estate and might be taxed later.

But if you put it in a trust, it’s out of the estate forever, and you’ve used the NRB efficiently.

Question 11

What conditions must be met to claim RNRB?

Answer 11

• A “qualifying residential interest” (QRI) must be inherited by direct descendants.

Question 12

How can RNRB be lost?

Answer 12

• If residue is split between chargeable and non-chargeable beneficiaries.
• If the property is left in a discretionary trust.

Question 13

What are the key advantages of a discretionary trust in a will?

Answer 13

• Keeps assets out of a beneficiary’s taxable estate.
• Protects assets from creditors/divorce claims.
• Can manage IHT liability over multiple generations.

Question 14

When can a trust reduce IHT?

Answer 14

1. LCT- if you use your NRB OR if you survive 7y after the transfer
2. Discretionary trust on death - NRB to fund the trust without IHT; remember if the trust is created in your will, the assets are still in your estate at death therefore the value going into the trust will be subject to Inheritance Tax.

Question 15

Why does a discretionary trust not qualify for RNRB?

Answer 15

RNRB only applies if descendants inherit outright.

Question 16

What is a 2-Year Discretionary Trust in a will?

Answer 16

A temporary trust that allows flexibility in asset distribution.

Question 17

How does a 2-Year Discretionary Trust benefit IHT planning?

Answer 17

• If assets are distributed within 2 years, the trust is treated as if it never existed for IHT.
• If assets pass to exempt beneficiaries, a refund of IHT can be claimed.

Question 18

What is a Life Interest Trust?

Answer 18

A life tenant receives income, while capital is preserved for remaindermen.

Question 19

How does a Life Interest Trust impact IHT?

Answer 19

• If the spouse is the life tenant, spouse exemption applies.
• If a non-spouse is the life tenant, IHT applies at death.
• If life tenant is not a spouse and remainderman is spouse, spouse exemption does not apply.