Webinar IHT: the details that could trip up paraplanners

(00:05) Now, and then I'll stop speaking in a minute. Good afternoon and welcome to another Paraplanners' Assembly online assembly. My name is Richard Allum, I'm one of the founders here at the Assembly, and I'm also a paraplanner and have been for a long, long time. I'd like to start off by thanking our supporters. That's Aegon, Barnett Waddingham, M&G, Quilter, Scottish Widows, Transact, and Wealthtime. Without their ongoing support we just couldn't do these kinds of things. And Ian's popped a couple of links in the chat already for some upcoming events. Tomorrow we've got our next informal assembly for outsourced paraplanners and administrators, or those that are thinking of joining us over on this side. And we are focusing the talk tomorrow on how we are actually using AI. Some practical tips being shared there. You can sign up for the link that Ian's popped in in the chat there, or go onto our website for that one. And on the 9th of September we have got a session called "What do Dickens do Wills, and LPAs actually say?"

(01:00) So, very important parts of financial planning. We did an assembly a couple weeks ago all about death, and this links in nicely with that one. So if you want to learn what wills and LPAs are about, what you need to watch out for, then you can sign up for that one on the website as well. If it's your first time here, welcome. You can follow us by clicking the button at the top of your screen, and that should let you know whenever we go live. You can pop questions in the chat room, which many of you are doing already. If you're having problems with your audio, Jason, then a refresh often works. If that doesn't help you, then pop something in the chat room there. So yes, you can pop questions in the chat there. There's also a link on the right-hand side of your screen with a question mark inside it. You can pop questions inside there, which Andy's done already. People can vote on those, they can kind of add comments to them, and I'll keep an eye on all of those and bring them up as we go. This

(01:54) is being recorded, and the video replay will be available on this link straight away, or on our website, and the podcast episode will be in your podcast player of choice tomorrow morning. There will be one hour CPD available for this event, and we're going to send out a link tomorrow to everybody that signed up for this event. So no link today, but we'll send that out in an email to you tomorrow. Right, well, let's get going then. So IHT seems to be the main planning point for lots of clients at the moment, triggered in some part by the inclusion of pension funds from April next year. Nobody saw that coming in the budget for 2024, did they? That wasn't on my bingo card. However, it's not all about pensions. IHT planning has been a core part of what us paraplanners do for many years, and it's fair to say that it can be quite a tricky area. So today we'll be looking to unpick the areas that most often trip paraplanners up, and look at the planning opportunities hidden in the detail. This

(02:49) is also your chance to ask any IHT-related questions you've been dying to ask, and we'll see if we can answer those. Pop those in the chat as we go. I'm very pleased to welcome back to the assembly for the second time this year, our guest today. Elaine, could you introduce yourself? 

(03:04) Thanks, Richard. I'm Elaine Cruickshank, Tax and Trust Manager in the Sales Technical Team at Aegon, and I'm delighted to be back presenting today on inheritance tax.

(03:14) It's good to have you with us. Elaine's in Edinburgh. So it's sunny up there, which is nice because it's not where I am.

(03:19) It is. It is. I don't think it's scheduled to last. I think there might be thunderstorms coming in, but I'll enjoy the sunshine while I can.

(03:27) Exactly. And to quote from a very old financial services advert, there may be trouble ahead. Pop in the chat and leave if you know what company that TV advert was from. Right, Elaine's prepared some slides for us because we've got a bit of detail to go into here, and you'll be able to download a copy of the slides from our website afterwards. So I'm going to bring those up on the screen now and hand over to Elaine, and I'll bring up questions as we go. So Elaine, it's over to you. 

(03:50) Thanks, Richard. Yeah, so I'm going to look at a number of different planning areas in relation to IHT today, and I have got some learning objectives here on the slides. So time permitting, I'm going to look at long-term residency and the spice exemption. I'm going to look at gifting, transferable no-rate band, the residence no-rate band, the 36% rate of IHT, and then other IHT planning considerations. All of this will be time permitting because past experience, sometimes it's hard for me to finish my slides within the hour that has been scheduled, but I'll do my best. So as Richard said, there is much more focus now on IHT planning going forward. IHT planning was always an area that paraplanners and advisors focused on, but there will be much more focus going forwards given the extension of IHT to pensions. And there were some figures published in the HMRC technical consultation relating to inheritance tax on pension liability reporting and payment. And HMRC estimates that out of around

(05:09) 213,000 estates with inheritable pensions in 2027, 2028, that actually there'll be 10,500 new estates caught by these changes that wouldn't previously have been affected. There'll be 38,500 estates paying more IHT, and the average IHT currently is 169,000, but that will increase on average by 34,000 when pensions are included. But these figures don't actually factor in behavioural changes. And also, it's not clear whether these are actually accurate or not. There could well be more estates that will be caught by these new measures than are currently estimated. And I think as well, I was talking to a colleague yesterday, and we were saying that we thought that IHT was, you know, relatively simple in comparison to some of the other taxes. But what I will say is that on preparing today's slides, it did make me realise just quite how complicated inheritance tax is. So I'm sure that you'll agree with me by the end of the session. So let's see how it goes today. So firstly, key considerations

(06:29) in mitigating an IHT liability. Obviously, you'll have to establish what the client's objectives are when they're looking at doing any IHT planning. You'll have to assess their assets and their liabilities. You'll have to consider what access they need to income and capital, because there's no point in giving away all their assets now and then having nothing to live on. You have to calculate what their current and projected future IHT exposure is. And also, I have to be careful not to trigger gift with reservation of benefit rules. So obviously, if they do make gifts, then those gifts have to be outright gifts with no strings attached in order for them to be effective from an IHT perspective. And also, watch out for pre-owned asset tax as well. Make sure that, you know, where the gift with reservation of benefit, where a gift is made and the gift with reservation of benefit rules aren't invoked. Just remember too that to watch out that pre-owned asset tax doesn't apply. Also, in doing any

(07:38) IHT planning, you have to consider things such as balancing the income tax with the IHT savings. So, for example, if someone's looking to take money from a pension to actually produce IHT savings, then arguably you wouldn't want them to incur 45% income tax on that withdrawal to save IHT at 40%. So bear that in mind. But obviously, if a client is approaching age 75, then it may well be beneficial to incur an income tax charge to do the IHT planning rather than having both income tax and inheritance tax applying post age 75. Also, have to consider that gifts could incur capital gains tax as well as inheritance tax. So, you know, consider here would holdover relief be available, for example. So if a client wants to pass assets into a discretionary trust, could a claim for holdover relief apply so that the CGT liability isn't actually crystallised now, it's deferred until a later stage. And also, in looking at IHT planning, it's worth considering currently about holding onto assets that actually 

(09:06) attract CGT, because on death, under the current legislation, there would be an uplift to the book cost of those assets because capital gains tax and inheritance tax don't currently apply on death of an individual. And the person who benefits from those assets after death would get an uplift to the book cost.

(09:28) I still can't believe that hasn't been taken out of legislation yet. That's such low-hanging fruit.

(09:33) I kind of suspect that this might be an area that we see changes on in the budget that's forthcoming on the 28th of October. But I'm just highlighting just now that under the current legislation, that still is, you know, something that's worth bearing in mind. You know, it's quite a good advantage, actually. You know, quite a great benefit.

(09:53) I don't think it's worth recommending to die before the budget just to make use of it, is it? 

(09:57) Oh, no, no, no, no. I think that would be a bit drastic, actually. But it's just, you know, in looking at planning at the moment, it's just worth bearing that in mind because you can only plan in accordance with current legislation, and that's what the current legislation states. So possible IHT mitigation options. In this slide in the past, I would have said, spend your pension last. But obviously, given the extension of IHT to pensions, we're now looking at all of the available IHT mitigation options for clients. So obviously, clients will have to revisit their wills, and I'll look at that in more detail as we go through the session. Obviously, making lifetime gifts and using exemptions will be an area that clients will want to explore. Maybe funding junior products such as junior ISAs and junior SIPs. Making use of reliefs such as business relief and agricultural relief, but obviously bearing in mind that there have been changes to business relief and agricultural relief, which I'll

(10:59) hopefully touch on later on in the session. And also bearing in mind the risk that comes with investing in assets that qualify for business relief as well. And also the fact that the legislation could change again as well, because those changes were brought in whilst Keir Starmer was in charge of the Labour Party. So again, we might see these aspects of changes being revisited now that Andy Burnham is in charge under John Healy as the Chancellor. Some clients might simply want to create a legacy with life assurance, so leave the money for their children, you know, to make good any shortfall and then benefiting from the estate after inheritance tax has been paid, or leave the money in trust so that the children can lend the personal representatives the money to actually meet the IHT liability, assuming that the children are the beneficiaries under the will or under the estate. Obviously, gifting assets to charity during lifetime or via the will can help to mitigate IHT because gifts to UK

(12:07) registered charities are exempt. And we'll look at the reduced 36% rate further on in the session. I think trust planning will come back into the fore, and you've probably already listened to sessions with bonds held in trust because I think that they will come back into the room as well as possible IHT mitigation options. And then for higher net worth clients, maybe family investment companies or family limited partnerships could be possible solutions to consider. So if I start first of all with who's subject to UK inheritance tax. Before the 6th of April 2025, you would be looking at domicile as being the determining factor as far as IHT is concerned. But from the 6th of April 2025, we've moved to a new residence-based test to see what assets are included within the estate for UK inheritance tax purposes. So for everyone, no matter where they're resident, UK-sited assets will be subject to UK IHT. So assets here in the UK will be subject to UK IHT. So even if someone lives overseas, they'll

(13:23) be subject to UK IHT on assets that are here. But for assets that are overseas, then an individual will be subject to UK IHT if they've been UK tax resident for at least 10 of the previous 20 years immediately preceding the year of the chargeable event. So if they've been UK tax resident for at least 10 of the previous 20 years immediately preceding the year of death or immediately preceding the year of the chargeable lifetime transfer being made. And it's important to note that that residence status is determined by the statutory residence test, and HMRC do have tools available to help clients establish whether they're UK resident or not UK resident. So worth looking at those tools if you've got any clients that are impacted by this. 

(14:14) Elaine, I've had a question which is kind of related to this, and we talked about who's subject to IHT, but who is liable to pay the IHT, and in particular regarding gifts?

(14:23) Yeah, so that's a good question. So if a gift has been made, then the primary liability falls on the person who has received the assets, because from an IHT perspective, the IHT charge generally follows the assets. So primary liability would fall on the recipient of the gift. So if it was an individual, it would be that individual who's received the gift, or if assets were settled into trust, then it would be the trustees in the first instance that would be liable for that IHT liability.

(14:57) I think in practice, it is the assets of the estate that pay the IHT, isn't it? But the recipient of the gift could be liable.

(15:04) Yeah, and as I say, the executors could actually recoup that money from the individual who received the gift, especially if that individual isn't a beneficiary under the will. Then, you know, actually, they will probably want, for the sake of making things fair, the executors will want to recoup that IHT from the recipient of the gift so that then the beneficiaries of the estate don't get shortchanged, basically. 

(15:35) I've been involved in a case where that happened, and it got very messy.

(15:38) Yeah. The general under the IHT rules, it falls primarily on the recipient of the gift because they've received the assets. So that would be the first port of call in relation to the IHT. And as far as actually shedding that UK long-term residency is concerned, if someone has been UK long-term resident for 10 to 13 years out of the past 20 years, then it will take three consecutive tax years for them to shed that UK long-term residency. And then there'll be an additional consecutive year for each additional year of long-term residency until we reach the stage of someone who has been long-term resident for 20 out of the last 20 tax years, and it will take them 10 consecutive tax years outside of the UK to shed that long-term residency. This will obviously impact on the spouse exemption as far as pensions are concerned. So this is why I'm covering it in some depth. But also, obviously, it will impact as well on looking at estates to establish what the IHT situation is. So with the spouse

(16:53) exemption, there's no restriction on the spouse exemption if assets are passing from a UK long-term resident spouse to a UK long-term resident spouse. There's full spouse exemption in that situation. If assets are passing from a non-UK long-term resident spouse to a UK long-term resident spouse. So if it's a UK residential property, for example, and that's passing from a non-UK long-term resident spouse to a UK long-term resident spouse, then you'll get full spouse exemption there in relation to that transfer. But the spouse exemption is restricted to 325,000 if assets are passing from a UK long-term resident spouse to a non-UK long-term resident spouse. So that's just a little pitfall here to bear in mind. But that non-UK long-term resident spouse can elect to be treated as though they were UK long-term resident in order to qualify for the full spouse exemption. These rules will become more relevant as far as pensions are concerned, because obviously, in looking to see what IHT applies

(18:00) to pensions, you're going to have to look to see whether the spouse exemption would apply in relation to benefits that would actually pass from the pension out to beneficiaries. So this is why I'm covering this in a little bit of depth. And the downside, though, is if that non-UK long-term resident spouse elects to be treated as UK long-term resident, then they'll be subject to UK IHT on their worldwide assets. And even if they are still living overseas and they have no intention of coming to the UK, they'll be subject to UK IHT on their worldwide assets for 10 consecutive full tax years until they shed that long-term residency. So just worth bearing that in mind in relation to any advice that's being given. 

(18:47) If I turn now to gifting as the first section of my session, there are IHT exemptions that apply only during lifetime, and then there are IHT exemptions that apply during lifetime and/or on death. So as far as lifetime exemptions are concerned, you'll have the annual 3,000 exemption, and if it's not used in one year, it can be carried forward for one year only. You've got small gifts exemption, and then you've got normal expenditure out of income exemption. And I think that this is one that we will see being used more widely given the extension of IHT to pensions.

(19:24) We've had questions on this one. Quite a variety of them. So do withdrawals taken from a pension qualify for regular income for which you can make gifts?

(19:36) Okay, so essentially, there are three conditions that have to be met for normal expenditure of income exemption to apply. So firstly, the gift has to be out of income after tax, and that income is taken one year with another. So if, for example, the client were to take a lump sum PCLS, or if they were to take UFPLS and just one single UFPLS, then you've got a lump sum there, and there's not going to be any other years of taking, you know, that income and, you know, that tax-free element. So I think that it's likely the HMRC will deem that to be capital, and it won't meet the income test. If, however, clients take income over a number of years, you know, so they're taking partial UFPLS, or if they're taking drawdown, you know, regular drawdown withdrawals and sort of regular PCLS being applied to those, you know, drawdown withdrawals. So, for example, through drip fee drawdown really is what I'm trying to say. Then arguably, that may be deemed to be pension income because that's over a number

(21:04) of years. So it would meet the taking one year with another definition, because you'd actually have a pattern of income being established. But I do still think that this is a potential gray area, and I think the more the HMRC see this being done, the more that they may well look into this, and the more that we may see HMRC trying to take, you know, a tax case to court to try and establish 

(21:35) whether normal expenditure out of income exemption should apply in that particular situation.

(21:41) Thank you.

(21:41) So a bit of a long-winded answer there, but I think suffice to say that actually the longer the term that these withdrawals, you know, drip fee drawdown is taken or partial UFPLS is taken, the more regularity that those withdrawals are taken over, the better to suit that regular pattern being established, and the longer the timeframe, I think the better as well to establish, again, that pattern. Other factors that have to be considered is that obviously, if they were to take, you know, the tax-free cash and it sits in a bank account, then HMRC deem it that money sitting in a bank account becomes capital anyway after it's been accumulated for two years. So again, it's probably unlikely to meet that condition of being out of income. And apart from that, you have to. Normal pattern of gifting established. Again, that would be generally over a course of three to four years, HMRC stipulates. And again, it would be regularity of gifts being made, so similar recipients. And if the donor doesn't

(22:46) know who they want to make the gifts to, then actually, I think we'll see more gifts being made into discretionary trusts. So discretionary gift trusts, I think, will become more popular with regular gifts out of pension income being made into discretionary trusts to meet that regular gift. And also, it is possible, as Richard said, for one gift to qualify so long as the evidence is there that the intention was to make more gifts over a number of years to satisfy that pattern. So the more evidence that is available, the easier it will be for the personal representatives to actually argue the case for the exemption to apply. And then finally, the donor shouldn't eat into their capital after making the gift. So 

(23:33) after making those gifts, they should still be able to maintain their lifestyle out of their income. So I think in all of this, good record keeping is going to be really important. Using IHT 403 as a template, and obviously, maybe trying to make gifts out of the same bank account that the income's coming into as well, you know, as far as possible. Other exemptions, gifts in consideration of marriage, gifts for family maintenance, that's not an exemption per se, but where money is paid for school fees, for example, for minors, then they are not treated as transfers of value, or where payments are made for the benefit of adult dependents, for example, they can also be covered by Section 11 gifts for family maintenance.

(24:22) Just to be clear, on the school fees one, that's if you pay for your own children's school fees, not a grandparent pays.

(24:28) That's correct. It's where you're paying for a dependent, effectively. So your dependent, your child. Yeah. It's a good clarification point. Thanks, Richard, for adding that. And then you've got inter-spouse transfers, gifts to charity, political parties, and gifts for the national benefit. Those exemptions apply on gifts made during lifetime or on death. So turning now to lump sum gifts. Obviously, you'll be aware that there are two forms of lump sum gifts that are potentially exempt transfers and chargeable lifetime transfers. Potentially exempt transfers are gifts from one individual to another, or gifts into certain types of trusts since 2006, so gifts into bear trusts and disabled trusts. So because these are potentially exempt, there's no limit to the amount gifted, and the donor just has to survive for seven years for the value of the gift to fall outside of their estate. And obviously, as I mentioned earlier, it has to be an outright gift with no strings attached. If death occurs

(25:31) within seven years, then taper relief may apply to the IHT that's due. And I've got an example just to show how that would work in practice. In contrast, chargeable lifetime transfers are gifts into most other types of trusts since the 21st of March 2006. And if the gift exceeds the donor's available no-rate band, there's lifetime IHT due on the excess at 20% if it's paid by the recipient, or 25% if it's paid by the donor. And IHT is recalculated at 40% if the donor dies within seven years. And again, taper relief can apply to reduce any IHT that's due, with credit being given for any lifetime IHT that was paid on the CLT. It's worth bearing in mind, though, that for the purposes of the lifetime tax, you can't offset any transferable no-rate band. It's only the no-rate band that can be offset for the purposes of calculating that 20% or 25% lifetime charge that would be due. So looking now at IHT on a potentially exempt transfer, I've just got a little example here to illustrate the point. 

(26:40) David wants to make a gift of half a million to his daughter, Lily. He hasn't made any previous gifts apart from using his 3,000 pound exemption for this year and last. And you can see here on the slide that his potential IHT liability will reduce with taper relief if he survives for at least three years. It reduces, obviously, from 80% in years three to four, 60% in year four to five, 40% in year five to six, and 20% will be due in years six to seven. It's important to note that if the gift had fallen within the no-rate band, then there would be no taper relief due. That's a question I get asked quite frequently. Taper relief only applies in relation to situations where there is IHT payable on the death of the donor.

(27:39) If we look now at chargeable lifetime transfers and how IHT works on chargeable lifetime transfers, we've got John, who created a discretionary trust on the 1st of June 2024. And despite the advice given by the financial advisor, he transfers half a million to the trustees, obviously incurring an immediate chargeable lifetime transfer tax. He's made no other chargeable transfers in the previous seven years, and his annual exemption has been used elsewhere. As far as the lifetime charge is concerned, you've got the gift of half a million, less the no-rate band of 325,000. So you've got IHT due on the excess at 20% as the trustees are going to meet that IHT liability out of the trust fund. But that's obviously not the end of the story, because in this scenario, we've got the fact that John dies on the 1st of August 2029. So as he's died within that seven-year period, you have to recalculate the IHT at the death rate of IHT of 40%. So the recalculated IHT is 70,000. But as he died in years

(28:54) five to six, taper relief applies. So it would only be 40% of that IHT that would be due. So after taper relief, the IHT liability would be 28,000. Now, obviously, we saw in the previous slide that the trustees paid 35,000 on the CLT. So on John's death, there will be credit given for that lifetime tax that was paid. So there won't be any further tax to pay, but there won't be any refund either of the 7,000 of excess tax. So that's just something to bear in mind in relation to the way that CLTs work on death. So turning now to the 14-year rule. This, again, is an area that I get asked quite a lot of questions on. So firstly, when someone dies, you have to look back over the seven years prior to death to establish whether any chargeable lifetime transfers or potentially exempt transfers were made. And you have to establish, obviously, in chronological order which gifts were made, starting with the oldest first. But that's not the end of the story, because then there's step two, because what

(30:10) you have to do is, in relation to each of those gifts that have been made, you have to look back seven years from each of those gifts to see if there were any CLTs or failed pets made, because if any prior failed pets or CLTs were made, then they'll use up the no-rate band first of all. 

(30:33) So just to show what that would mean in practice here, I've got a little case study. So we've got Jane that made a gift of 300,000 into a discretionary trust in June 2017. So she made a CLT. And then she made a gift to her daughter on the 27th of June 2023 of 250,000, which was a potentially exempt transfer. And she then passed away on the 3rd of June 2026. So firstly, we can see that in the seven years prior to her death, she made a potentially exempt transfer of 250,000. So that becomes a failed pet. You then have to look back seven years from the date of that failed pet to see if there were any chargeable transfers made. And you can see in this example that there was actually a CLT made in the seven years prior to that potentially exempt transfer. So what that means is that the no-rate band will be offset first of all against that chargeable lifetime transfer, meaning that there'll be less no-rate band to offset against the failed potentially exempt transfer. So the IHT calculation would

(31:49) be 300,000 plus 250,000, so that's the value of the CLT, plus the value of the failed pet, less the no-rate band of 325,000. So that gives you net 225,000 multiplied by 40%, so 90,000 IHT due in relation to that failed pet. And because she passed away within three years of making the pet, there's no taper relief applying. So it would be the full amount of the 90,000 IHT that would be due. So obviously, the more gifts that are made in the seven years prior to death, the more complicated that this can become. But I'm just trying to set out the principles here that you have to bear in mind.

(32:31) That's a classic exam question, that one, isn't it?

(32:33) It is. It is. Yeah. And it's a classic as well in relation to protection and how to work out how to protect the IHT liability on all of these gifts as well. But I won't go into that now in respect of time, because I'm conscious that time's ticking on. If we turn now to the transferable no-rate band and how this applies. So transferable no-rate band is available to a surviving spouse who dies after the 9th of October 2007. That's when the legislation came into force. So it's worth bearing in mind that even if the first death was prior to the 9th of October 2007, the surviving spouse's executors can obviously claim 100% of the resident's no-rate band in that situation, because the first death actually occurred before the legislation was enacted. So obviously, 

(33:31) the no-rate band couldn't have been, you know, because the legislation wasn't enforced then, there wouldn't have been any transferable no-rate band to consider. You know, you wouldn't have to consider, obviously, how assets had passed or anything. It's just the fact is that 100% will pass to the surviving spouse.

(33:56) The amount, obviously, depends on the unused percentage of the no-rate band on the first spouse's death. And that unused percentage will then be applied to the prevailing no-rate band on the second death. And the personal representatives have to make a formal election to actually claim the transferable no-rate band, and they have to do that on IHT 402. And that's to transfer any unused allowance on the surviving spouse's death. And obviously, it can be transferred on more than one death if the surviving spouse is pre-deceased by more than one spouse, but up to a maximum of 100%. So it's really important that clients keep good records from previous deaths to make it easier for the personal representatives to know how much can be claimed. So I've got some examples here to show how this would work in practice. So firstly, we've got Jack. And Jack died on the 1st of June 2020 when the no-rate band is 325,000. His estate is worth half a million, and he leaves 156,000 to his children and the

(35:05) remainder to his wife. Obviously, transfers between spouses that are generally exempt. And Jack's no-rate band in this situation is 52% unused. And then on Jane's subsequent death, when she dies, the prevailing no-rate band is also 325,000. Now, if when Jane had died, the prevailing no-rate band was 400,000, then that 52% of unused no-rate band would be applied to the 400,000. But it's just here, the no-rate band in the year of Jane's death is 325,000. So you can see that as far as Jane's personal representatives are concerned, they can claim Jane's no-rate band, and they can claim 52% of Jack's no-rate band by way of transferable no-rate band, meaning that there is 494,000 to offset against the estate.

(36:06) As far as previous marriages are concerned, if we use that example there, we've got the fact that Jack's no-rate band was 52% unused following his death. Jane, a bit of a flimsy here. She remarries fairly quickly after Jim's death. He died in 2020, and she remarries in 2021. And Jim then dies in September 2025 when the no-rate band is 325,000. His estate's worth 700,000, and he leaves 250,000 to his children and the remainder to his wife, Jane. As far as Jim's no-rate band is concerned, it's 23% unused. So on Jane's death, her personal representatives can claim her no-rate band, the 52% of the prevailing no-rate band from Jack's death, and then 23% of the prevailing no-rate band following Jim's death. So you can see here that actually, as she's been pre-deceased by two spouses, then the personal representatives can claim the unused element from both of those deaths up to the maximum of 100%. So obviously, if on Jim's death it had been 50% unused, then it would be 48% that would have been 

(37:27) able to be claimed.

(37:31) Lots of comments about Jane in the chat. I say, go, Jane.

(37:36) Yeah. I mean, there's obviously the situations as well where the estate could benefit from three no-rate bands. So for example, if on Jack's death, Jack had had a no-rate band discretionary trust in his will, and that had made use of his no-rate band 100%, you know, with the assets going into the no-rate band discretionary trust. And then on Jim's death, his no-rate band was 100% unused. Say, for example, everything had passed to Jane. Then on Jane's death, Jane's executors would have been able to claim two no-rate bands, but you would have had the full benefit then of three no-rate bands in that situation with the use of trusts.

(38:15) So turning now to the resident's no-rate band, we've got the fact that death has to occur after the 5th of April 2017, as again, that was when the legislation was enacted. And the deceased has to leave an interest in a property that's been their main residence at some point, and they have to leave it to direct descendants, so children, spouses, grandchildren, spouses, and adopted stepchildren. And the home has to be left to them in the will or under the rules of intestacy or by some other legal means. And by main residence, interestingly enough, that doesn't have to be a house. It could be a static caravan, or it could be a houseboat if someone's got a houseboat on the Thames and that's been their main residence. And if the client actually has two properties that have been their main residence on their death, then the personal representatives can actually elect which one they want the resident's no-rate band to be offset against. 

(39:24) So there is an element of flexibility there, but it's important to note that the property has to have been a main residence. So a by-to-let property wouldn't qualify for the resident's no-rate band.

(39:37) Just on that, if a property was a main residence and then they moved out and let it out, they have been a main residence at some point. So that does still qualify, doesn't it?

(39:45) That still qualifies. That still qualifies. It's just if it's never, you know, some people will buy a by-to-let as a pension asset effectively, and they'll never live in it, then that won't be able to qualify because it's never been a main residence. And even if someone actually moves in to a property and they move all of the stuff in lock, stock, and barrel with the intention of it being their residence and they die within a few days, and that residence is going to pass to direct descendants, then they can still qualify. That could still be deemed to be a main residence, because actually, what HMRC will do is just look at the situation in the round. They'll look at the circumstances of the case. So important to note that the resident's no-rate band doesn't apply to chargeable lifetime transfers. So if a property is gifted into a discretionary trust, for example, it won't apply in relation to the lifetime tax. So that's just something to bear in mind.

(40:43) It can apply in relation to someone who goes into a care home or someone who goes into sheltered housing, for example, or someone who chooses to downsize, where they choose to do that after the 7th of July 2015. And it actually will apply where the former home would have qualified for the resident's no-rate band, and there are still assets in the estate making up the value of that former property, and the assets pass 

(41:22) to the direct descendants, if I can get my words out here. And there are two different calculations that have to be made depending on whether actually they no longer own the property because they've sold the property and gone into a care home, as opposed to where they've downsized. So they own a property, but actually that property is worth less than the former residence that they had. And there's detailed guidance on the HMRC website. And HMRC also have a calculator to help to work out how much resident's no-rate band applies as well. So that's just something that's worth bearing in mind, because these rules can get incredibly complicated very quickly. And where the estate's worth more than 2 million, the resident's no-rate band is tapered away. So for every 2 pounds that the estate is worth more than that 2 million threshold, so a pound of the resident's no-rate band is actually tapered away. So this is where pensions will obviously have a bearing on this, because pensions will actually

(42:22) be included within the estate for these purposes, because that 2 million threshold includes assets in the estate after liabilities. It includes any trust interests, so like any interest in possessions that qualify to be formed part of the estate. But it's actually measured before taking off any exemptions and reliefs and before taking off the resident's no-rate band as well, or the transferable resident's no-rate band.

(42:54) I thought we'd get some questions on this one, and we have. So I'm going to pause here and ask a few questions. So on the tapering at the 2 million pounds, if you've got a couple and the first person in that couple dies, and their estate is worth more than 2 million pounds, then their resident's no-rate band that could be transferred is tapered down, understandably.

(43:16) That's correct. 

(43:17) What happens if there are jointly held assets at the time of death of the first spouse?

(43:23) Then in relation to those assets, it depends obviously on how the assets are held, because effectively, the assets can be held as joint tenants or tenants in common. And the 2 million taper threshold would take into consideration the component that forms part of the estate. So it can have an impact, unfortunately.

(43:59) Yeah, it gets quite messy, that one, doesn't it?

(44:01) Yeah. And also worth bearing in mind, too, that in relation to the transferable resident's no-rate band, if the estate on the first death is worth more than 2 million, the resident's no-rate band will be tapered down, even if the assets pass by survivorship to the spouse, which means actually that the personal representatives will have less that they can claim by way of a transferable resident's no-rate band. And then obviously, you would also then be measuring as far as the transferable resident's no-rate band and the resident's no-rate band is concerned on the second death, you'd then also be looking at what the asset value is in the surviving spouse's estate. So again, those could be tapered down. So again, care will have to be taken around the value of the estate for the 2 million taper threshold. 

(44:57) Yeah, Colin's put a good comment saying, "A good clue is to get a copy of the probate or inventory for the estate, and that's going to show you."

(45:03) That'sright.

(45:05) And that's what the revenue will work on. And again, I'm sure most parents know, but deathbed gifting to get below the 2 million taper threshold is perfectly acceptable.

(45:14) That's good. 

(45:15) And it really does help a lot.

(45:17) That's correct. And as far as the resident's no-rate band is concerned, just an example here to show how it works in practice. You've got Amanda who died leaving a house worth 150,000 and other assets of 450,000 to her daughter. So she leaves everything in her estate to her daughter. In the tax year 26-27, the maximum available no-rate band, resident's no-rate band, is 175,000. But you have to remember that the estate will only qualify for resident's no-rate band to the extent that there's value in the residential property. So in this example here, the house was worth 150,000. So actually, the resident's no-rate band applying to Amanda's estate will be the lower of the value of the property or the resident's no-rate band. So in this scenario, it would be 150,000. So you've got the value of the estate, 600,000, less the resident's no-rate band, less the no-rate band of 325,000, giving you a net estate of 125,000 with IHT at 40%. So some planning opportunities here. You've got the fact that

(46:30) you'll have to review will trusts, and that's where your next session when you're looking at provisions within a will will become really invaluable, because certain will trusts will prevent the resident's no-rate band applying, because for the resident's no-rate band to apply, the assets have to be directly inherited. So a discretionary trust would prevent property from being closely inherited, as would age-contingent gifts as well. They would actually prevent the property from being closely inherited. But bear trusts, for example,

(47:10) or immediate post-death interest trusts can qualify for the resident's no-rate band. And if, for example, there's an immediate post-death interest trust for the spouse, so meaning the spouse exemption applies, but there are direct descendants that apply on the spouse's death, then the resident's no-rate band that's unused can be transferred on the first death and then can be offset when the assets pass then on survivorship. As Richard said, the failed potentially exempt transfers and chargeable transfers don't count towards the 2 million taper threshold. So deathbed gifting may well be worthwhile being considered, and it's worthwhile considering using the resident's no-rate band on a first death to avoid taper on second death or use the resident's no-rate band as well on first death. Use a no-rate band and trust within the will of the first spouse to die, rather than the assets passing directly by spouse exemption to try and actually mitigate the surviving spouse's estate becoming greater 

(48:15) than the 2 million taper threshold.

(48:20) So if I just turn now to wills, I know you've got a session coming up on wills, but it's incredible how few people actually have wills in place. So according to the National Will Report, 53% of adults in the UK have made a will. And actually, 41% of 18 to 24-year-olds have a will, so actually well done to those younger, those in the younger generation. That increases to 47% for 25 to 54-year-olds and 69% of those aged 85, sorry, 55 and over. I must admit, at 18 to 24, I didn't have a will in place, so, you know, it wouldn't have been the first thing that sprung to my mind. And actually, those that are single are less likely to have a will in place than someone in a relationship or living with a partner. And I think that's probably quite self-explanatory, because those that are in a relationship will probably want to make provision for their partner. And that's why putting a will in place will be deemed more important. And actually, I thought it was interesting that the three biggest areas

(49:21) for will writing are Scotland at 58%, but I think that's because we have legal rights in Scotland. So I think that, therefore, people are more inclined to look at their will and make adequate provision. London, and that's probably because of the net wealth in London in very general terms, and Southwest at 57% as well. So I think with the extension of IHT to pensions, I think that clients will have to revisit their will. And I think that your next session that's coming along will be really important. So I won't dwell on this in much detail, but obviously, I think it will become more and more important to review who is appointed as personal representatives. Personal representatives are personally liable when they're carrying out the duty of administering an estate. So actually, you'd want to make sure that they are happy to act before you name them in a will. And I think that that will become even more important in relation to the extension of IHT to pensions, where more estates will be caught

(50:20) by inheritance tax, for example, and estates will become much more complex to administer. Some wills might not have been reviewed since 2007, so before the transferable no-rate band provisions were introduced, and they may not have been reduced before the resident's no-rate band provisions were introduced. So again, really valid reasons for revisiting wills and making sure that they're up to date and reflect the wishes of the testator, and actually that they're making best use of the resident's no-rate band and transferable no-rate band. Obviously, you have to revisit as well the will in relation to the 36% reduced IHT rate, because the extension of IHT to pensions will have an impact on the baseline estate for those purposes. And also maybe want to revisit where percentages of the value of the estate are left to beneficiaries, because whilst the will might have been put in place in, I don't know, say, 1996, the value of assets could well have actually increased greatly. So are those percentages 

(51:21) still relevant given where we're at today with the value of the assets in the estate? So if I turn now to the 36% rate of IHT, the IHT rate that falls to 36% if at least 10% of the net baseline amount is left to a qualifying UK charity. And estates are divided into three components. You've got the general component, the survivorship, where properties pass by survivorship to the surviving owner automatically, and you've got the settled property component. And that 10% test as far as the baseline assets are concerned applies to each component in isolation, but the personal representatives can elect within two years to merge the components if actually the charitable gifts exceed 10% of the combined value. And each component is valued after deducting relevant liabilities, reliefs, and exemptions, and with a proportionate share of the available no-rate band and any transferable no-rate band applied. But the resident's no-rate band and transferable no-rate band aren't deducted when calculating

(52:31) the 10% threshold. And it's important to note that the gift of the UK, the gift to the UK registered charity will be exempt from IHT, but the remaining taxable element of the estate, so the taxable component of the estate, can benefit from the reduced 36% rate. So that was quite a lot to cover on one slide. I'm sure that you'll agree the devils in the detail. But just to show an example here of how that would work, you've got a free estate of 800,000, trust interest of 200,000, no-rate band of 325,000, and 100,000 of transferable no-rate band, and the charity legacy of 65,000 provided in the will from the residue of the estate. So you can see here we've got two separate components of the estate, the general component and the settled property component. And it's worth bearing in mind that pensions will fall within the general component as far as the looking at the baseline element of the estate is concerned, moving forwards. So you look at the value of the component after deducting liabilities,

(53:40) reliefs, and exemptions. And you can see here the general component, the free estate was 800,000, less the proportion of the no-rate band and transferable no-rate band that applies to that component of the estate. Got the baseline element, and 10% of the baseline is the donation that would be required. So 46,000 of a donation would be required in order for the 36% rate to apply to that component of the estate. And as far as the settled property is concerned, again, it would be the value of the settled property, less the proportion of the no-rate band. So baseline of 115,000, 10% of the baseline amount of a donation that would be required would be 11,500. So you can see the general component qualifies here. The settled property component doesn't qualify in its ownright because there's no charitable trust, but the executors could actually make a formal election to have the components merged so that they benefit from 36%.

(54:41) So planning opportunities, a deed of allegiance could be considered within two years of death to increase the donation to the charity to meet the 10% test. If there hasn't been enough of a donation made during lifetime, you know, within the provisions of the will to actually meet that baseline amount. And it may also be better to leave a percentage of the value of the estate to charity in the will rather than an absolute amount, because obviously you can see that 10% of the baseline value of the estate will fluctuate depending on asset value. So it might be better to say that 10% of the residual estate, for example, has to be left to charity rather than a notional value of 65,000, because that 65,000 might not actually be enough to meet the 10% charge as far as the baseline amount is concerned. Again, HMRC provides a calculator to help work out if the estate qualifies for the reduced rate. In the interest of time, I'm just going to turn now to 

(55:51) one final slide just to sum up. So golden rules of IHT planning, obviously vitally important to start early. Consider using exemptions year on year. Don't give away assets that are still required. Maximize the spouse exemption. Preserve the resident's no-rate band wherever possible. Consider that 2 million threshold and the planning opportunities around that. Keeping good records are going to be vital going forwards as things become more and more complex. Understand the ownership of assets and the own jointly. Have we got trusts, or have we got trusts in place owning the assets, or are they business assets? And review the IHT plans regularly. Are they still fit for purpose? And obviously, having a valid will in place makes all of this so much easier. And I'd just like to thank you for your time today. That was an awful lot that we covered.

(56:44) We did squeeze a lot in there, and we've got a lot of questions. Elaine has actually agreed that if we don't get time to do them all, she won't. She's going to answer some afterwards when we're on our website, which is really good. But I'm going to do a rapid fire on these now. So let's go back to what we've kind of touched on. So to do with pensions and 10%, if someone has the 10% gift in their will, do they need to update their will, or can this be dealt with in the pension expression of wishes?

(57:09) So effectively, they could go back and update their will. But obviously, if there is a charity lump sum, you know, if there's a charity lump sum payment made from the pension, then that will be included based on the fact that pensions form part of that baseline amount. But obviously, as far as the death benefit is concerned, there's no guarantee that the pension scheme administrators will make that payment to the charity. So bear that in mind. So the answer is not necessarily, but, you know, with that little proviso that there's no that the money may not be paid to the charity, because actually when the pension scheme administrators look at all the factors in the round, they may not choose to make the payment to the charity.

(57:56) Yeah, makes it even trickier, doesn't it? Again, who'd want to be a personal representative? Solicitors are going to love this, aren't they? Going back to gifts. 

(58:04) I hope there's enough solicitors around to satisfy the demand.

(58:09) Going back to gifts and.

(58:10) And enough paraplanners and financial advisors around as well, because this is going to become horrendously complex and horrendously expensive for clients as well, I think.

(58:19) Exactly. If a client increases drawdown withdrawals to create more surplus income, will the revenue wear this on the gifts out of income? 

(58:28) So again, if they increase the drawdown income, then actually the legislation says taking one year with another. So if they're then forming a regular pattern of taking increased drawdown payments year on year, then that could satisfy the pattern.

(58:44) Okay, brilliant. Next one here is from Jim. Can the small gifts exemption and the annual £3,000 exemption be given to the same recipients?

(58:53) So effectively,

(58:57) it's an all or nothing. So £250,000 to the small gift recipient, and to the extent that actually the £250,000 is exceeded, then it would be the annual exemption that would apply. 

(59:11) It's £250,000, is it, rather than £250?

(59:14) Yeah. Sorry. Sorry.

(59:18) Did I miss that memo?

(59:21) Sorry. 

(59:22) Sorry. I'm firing these at you very quickly, aren't I? Right, I think actually.

(59:26) I'm just trying to late it, just trying to late in the mood here after what has been quite a highly technical session.

(59:32) Just making sure we're listening, aren't you?

(59:34) That's right. 

(59:35) We have run out of time, I'm afraid. So I will get Elaine to answer all the other questions you've sent in, because there were some crackers in there as well. So thank you very much for all of those. But Craig, that hour has gone by so quick. Don't forget, you can keep the conversation going on the Big Tent. We've got a couple of events coming up. We've got a reformer Sunday for outsourced paraplanners and administrators tomorrow. Our wills and LPA session on 9th September. You can book those on our website. But that just leaves me to say thank you to our supporters. That's Aegon, Barnett Warningham, M&G, Quilter, Scottish Widows, Transact, and Wealth Time. A massive thank you to you, Elaine, for preparing for this and for sharing your wisdom and knowledge on this particular area. Don't forget, the video replay is going to be available here or on our website, and the podcast episode will be out tomorrow. Thank you for all your questions, loads of them actually. I say we will publish those

(01:00:23) on the website. But from us, it's thank you and goodbye.

(01:00:26) Thanks, everyone.