Off-the-shelf IHT solutions: pros and cons

Greater risk of IHT

The inheritance tax (IHT) nil rate band (NRB) of £325,000 hasn’t changed since 2009 and is set to stay at the same level until at least April 2026. As a result, and despite the introduction in 2017 of an additional NRB for homes (the residence nil rate band), the freeze on the main NRB has dragged a higher proportion of estates into the IHT net. Inevitably, therefore, people are in search of ways to preserve their wealth from falling into HMRC’s clutches. There are a number of off-the-shelf investment schemes that can help, such as discounted gift schemes (DGSs), but before turning to these you need to work out the level of exposure to IHT.

One million tax free

Most individuals who have never been married or in a civil partnership and haven’t made significant gifts in the last seven years of their life can leave an estate of £500,000 before IHT applies; it’s payable at 40% on the excess. This figure doubles to £1 million for spouses, civil partners, widows and widowers. Plus, there are exemptions for business and agricultural assets included in an estate. You should also consider if your estate will grow or shrink in value over the remaining years.

Simple planning

If you expect the estate to be liable to IHT, before turning to off-the-shelf IHT-saving schemes consider no-cost simple tax-saving measures:

• if you’re as certain as you can be that you won’t need some of your wealth to live off during the remainder of your life, reduce your estate’s potential IHT bill by making gifts of cash or other assets to those who you want to benefit from it. You need to survive seven years for a gift to be IHT exempt
• if you can’t afford to give away income-producing assets, consider a simple interest-free loan to your beneficiaries. While the value of the loan remains part of your estate, by lending to your beneficiaries they get the use of the money now rather than having to wait. Plus, whatever you lend does grow in value in your estate.

If simple IHT planning isn’t possible, a DGS might be the solution. They are insurance-based investment products and are accepted as legitimate by HMRC.

Who are they for?

DGSs work best if you can’t afford to lose income from your assets, and have a life expectancy exceeding seven years but less than 20. They typically provide a regular fixed tax-free income equal to 5% of the amount you invest. However, after seven years they become less tax efficient year on year. You can usually invest in a DGS if you’re 89 or younger and in reasonable health.

Do the basic sums first and if you still feel you need to reduce your exposure to IHT other than by simple planning methods, then contact an authorised financial advisor. While they are in the business of selling products they are closely regulated to reduce risk to your money.