Estate and wealth planning: Six lesser-known options

Most people know about the main ways to pass wealth through the generations efficiently: using trusts, for example, and gifts made to individuals more than seven years in advance of death. However, many other options that are less well-known can also be very effective in some circumstances. Here’s a brief look at six of them.

Gifts from surplus income

In most cases, gifts made less than seven years before someone’s death will be treated as part of their estate when calculating Inheritance Tax (IHT). Most of the exceptions are fairly small in the context of IHT: gifts of £250 or less are not counted, for example. But if your gift comes from your income (not from savings or by selling assets such as shares or property), and does not affect your usual standard of living, there is no limit to how much you can give and immediately be completely exempt from IHT.

Careful record-keeping is important when making any substantial gifts, and especially so when using the surplus income route because, after you die, your executors will need to prove to HMRC that gifts made during the previous seven years followed all the rules. This will probably be very difficult if you haven’t already assembled all the necessary information about your income and outgoings.

Giving a share of your house to someone who lives with you

Most people know that giving away your house while you are still living in it is usually classed as a ‘Gift with Reservation of Benefit’, which is not exempt from IHT. But the situation is different if the recipient lives with you. In this situation, you can give the other person, or people, a proportionate share of your house without it being subject to IHT on your death. Recipients are usually a partner or relative, of course, but they do not have to be. It’s also important to be aware that they cannot do anything that significantly benefits you, such as agreeing to pay all of the household bills.

Gifting your house and paying rent to continue living there

Another way to gift your house without being caught by the ‘Gift with Reservation of Benefit’ rule is to pay a full market rent to the recipient. However, a big drawback for many people is that the rent must be paid by the donor until their death, or when they otherwise leave the house – there is no cut-off after seven years. Also, the recipient may have to pay income tax on the rent they receive.

On the other hand, if the recipient does not already use all of their income tax personal allowance, and would therefore not see a big increase in their tax payments, this method has an additional advantage. As well as being a way to gift your house to someone without paying IHT, it also enables you to pass money to them without having to think about the seven-year rule.

The Residence Nil Rate Band

If your house is jointly owned and the value is less than £350,000, an allowance called the Residence Nil Rate Band (RNRB) might extinguish any IHT on it. The seven-year survivorship timeframe does not apply.

There are restrictions: your house must pass to ‘direct descendants’, and to get the full value of the relief the value of the joint owners’ estates must not exceed £2 million. (There is a taper charge of £1 for every £2 of excess value, so once a couple’s combined estate exceeds £2.7 million, there would be no RNRB available to their executors.) If the value of your estate will be higher, you could bring it down by making gifts, or simply by spending the excess on holidays or other disposable items. However you get to £2 million, using the RNRB with an estate at this value could cut the eventual IHT bill by £140,000.

Bear in mind that, after 6 April 2027, the total value of estates will include pension pots.

Deeds of Variation

A Deed of Variation allows someone to immediately pass an inheritance, or part of it, on to someone else. It’s a fairly simple process, and anyone who isn’t negatively affected doesn’t have to agree, or even know about it. If it doesn’t change the overall position for IHT, even the executors don’t have to be involved. It must be signed within two years of the original benefactor’s death, and once that is done it cannot be changed.

So, for example, if someone dies and leaves their estate to their four children, any of the four could use a Deed of Variation to pass their share directly on to another person or a charity. They would not have to consult any of the others. If the original beneficiary’s future estate is likely to be over the threshold for IHT, a Deed of Variation can be a tax-efficient option, but the tax aspects – both for IHT and for Capital Gains Tax – can be somewhat complex, so it’s important to have a full understanding of this when drafting the document.

A Deed of Variation can also be used after someone has died without a legally valid will. In such cases the estate is divided up according to a fixed set of rules, and the result may not match everyone’s preferences. This can be a solution, albeit one that is far inferior to preparing a properly drafted will in advance.

Giving at least 10% of your net chargeable estate to charity

Your ‘net chargeable estate’ is, put simply, what you leave after taking account of all IHT exemptions and reliefs. If you give at least 10% of this to charity, the rest will be taxed at 36%, rather than the 40% rate that usually applies. Bequests to registered charities are exempt from tax, so it can work out that the amount that they receive is considerably higher than the ‘loss’ of the other beneficiaries. In some circumstances, this can be a great way to maximise your generosity without greatly penalising everyone else.

Whatever you do…

Whatever form your estate planning takes, the same general principles always apply. Clear communication with everyone involved greatly reduces the risk of serious disputes arising later. And expert advice – based on a full consideration of not just the legal and tax aspects but also other important factors such as international elements and family dynamics – can often prove to be hugely beneficial. Even if your planning involves some lesser-known or more complex elements, don’t forget the basics.

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