What still works for IHT Planning in the UK?
Inheritance Tax (IHT) planning remains a major challenge for wealthy families, UK taxpayers, expats with UK assets, and investors. With an effective rate of 40% on estates above the tax-free threshold, IHT can significantly reduce the wealth passed on to loved ones. However, careful and strategic planning can help mitigate these costs, ensuring your hard-earned assets are preserved for future generations.
Despite recent changes to the UK tax landscape, several tried-and-tested strategies continue to provide effective IHT solutions. This article explores some of the most reliable tools for managing IHT, from Family Investment Companies (FICs), Life Insurance, to discretionary trusts and gifting strategies. Whether you’re just beginning your IHT planning journey or looking to refine your existing strategy, our insights will help you take smarter steps toward securing your financial legacy.
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Family Investment Companies (FICs): A Modern Solution for Wealth Transfer
Family Investment Companies (FICs) remain a robust option for those seeking efficient taxation and wealth transfer. Designed to enable families to manage investments and pass on wealth in a controlled way, they are particularly useful for intergenerational planning.
How FICs work
- Parents transfer wealth into a company and typically hold non-voting shares, retaining control over decisions while gifting value to their children through shares.
- The company’s income and capital growth are taxed at corporate tax rates, often significantly lower than personal tax rates.
- Over time, the value of the parent’s estate reduces, lowering IHT exposure.
Advantages:
- Strong control for parents while facilitating wealth transfer.
- Tax efficiency through corporate tax rates.
- Can be combined with discretionary trusts for added flexibility.
Example:
A couple wants to support their children’s future while maintaining control over significant assets. They first establish a FIC, next they transfer cash into the structure, and then acquire £1.5 million of investments within. They hold non-voting shares for themselves and gift voting shares to their children. Over time, the company grows in value while reducing the couple’s taxable estate.
Discretionary Trusts for IHT Planning and Asset Protection
Discretionary trusts continue to be a powerful tool for IHT planning, providing both asset protection and tax advantages. They allow you to allocate wealth flexibly, ensuring beneficiaries receive assets under the right conditions, such as reaching a certain age or achieving specific milestones.
Key Features
- Transfers into discretionary trusts may be subject to the 7-year rule, meaning the gift becomes free from IHT if the donor survives for seven years.
- Allows for controlled distribution of assets, protecting wealth from risks such as divorce or creditors.
- Can serve as a central component of intergenerational planning.
Caveat:
The nil-rate band limit applies (£325,000), and gifts exceeding this may attract a 20% immediate charge, depending on the trust setup.
Example:
A grandparent establishes a discretionary trust worth £325,000 for their grandchildren’s education. The trust ensures assets are used for educational needs while offering protection against potential financial risks.
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Loan Trusts and Discounted Gift Trusts
For those looking to maintain access to their funds while reducing IHT liability, loan trusts and discounted gift trusts are valuable options.
Loan Trusts
Here, you loan money to a trust, which then invests the funds. While the loan is repayable to you or your estate, the growth on the investment remains outside your estate for IHT purposes.
Discounted Gift Trusts
These allow you to make a gift while reserving the right to take a regular income, such as monthly payments. The IHT calculation discounts this future income when determining the value of the taxable gift.
Benefit:
Both strategies offer lifetime access to funds while reducing potential IHT.
Example:
A retiree gifts £300,000 into a discounted gift trust, retaining the right to draw £15,000 annually as income. If they survive seven years, the original sum moves out of their estate, reducing IHT liability.
Gifting strategies for smaller and larger gifts
Gifting remains one of the simplest and most effective ways to reduce IHT liability. HMRC allows several exemptions and reliefs to encourage timely wealth transfer.
Small Gift Exemptions and Normal Expenditure
- Annual Exemption: Gifts of up to £3,000 per year are exempt from IHT.
- Small Gifts: Gifts of up to £250 per recipient are IHT-free.
- Gifts from Income: Regular gifts made from surplus income are exempt if they do not affect your standard of living.
Larger Gifts and Potentially Exempt Transfers (PETs)
You can make unlimited larger gifts under the PET rules. These are IHT-free if you survive for seven years after making the gift.
Example:
A couple gifts £50,000 to their child to help with a house deposit. By surviving seven years, the gift becomes completely IHT-free.
Maximising Gifting Strategies for Inheritance Tax Efficiency
Investment in Qualifying Business Assets
For those willing to incorporate a bit of risk into their strategy, investing in qualifying businesses offers significant IHT relief.
What qualifies?
Investments in shares of certain unlisted companies, such as those listed on the Alternative Investment Market (AIM), can provide up to 100% IHT relief after two years. This is known as Business Relief.
Advantages:
- Opportunity for high growth while reducing the estate’s taxable value.
- Tax-efficient transfer of wealth to descendants.
Caution:
These investments carry higher risks and also come with liquidity warnings – such assets require considered financial advice. Learn more about Soteria Trusts’s Business Relief Account.
Example:
A business owner invests £250,000 in AIM-listed shares. After two years, this investment is exempt from IHT, provided the shares are still held at the time of death.
Life Insurance to cover IHT bills
Life insurance can provide your estate with the liquidity to pay an IHT bill without selling assets, such as property or investments.
How it works
- Purchase a life insurance policy with a sum assured equal to your IHT liability.
- Write the policy into trust so that the proceeds are outside your estate.
Example:
An individual with an estate worth £1.5 million purchases a life policy for £400,000, covering the estate’s anticipated IHT exposure. By putting the policy in trust, the proceeds are immediately available for the beneficiaries to pay any tax due.
Private Placement Life Insurance
Private Placement Life Insurance (PPLI) is a specialised type of Variable Universal Life (VUL) Insurance which combines life insurance coverage with a cash value component that grows through investments. It also offers an additional layer of tax-free death benefit and no CGT on investmnet growth. It’s a highly sophisticated product, for more information, please visit www.soteriatrusts.com/ppli
What still works for IHT planning?
| Strategy | IHT Benefit | Notes |
| QNUPS (2027+) | ❌ Limited | From 04/27 no longer effective for IHT shielding. |
| FIC | ✅ Strong | Long-term control + family wealth transfer. Asset & creditor protection |
| Trusts | ✅ Moderate | Good if planned early and structured well. Asset & creditor protection |
| Gifting | ✅ Basic but solid | Use exemptions + PETs – 7 year tapering of IHT |
| Business Relief (AIM) | ✅ Very strong | After 2 years, but higher risk |
| Life insurance in trust | ✅ Strong | Pays IHT liability without increasing estate value |
| PPLI | ✅ Strong | For wealthy clients, effective IHT toll, tax efficient transfer of wealth to family members. Asset & creditor protection |
Start planning your IHT strategy today
Inheritance Tax planning can feel overwhelming, but starting early and using proven strategies can make all the difference. From Family Investment Companies to discretionary trusts, gifting, life insurance and Business Relief investments, a range of options are available to fit your unique situation.
It’s important to tailor these solutions to your circumstances, ensuring a balance between immediate financial security and long-term estate planning. At Soteria Trusts, our experts specialise in the construction of comprehensive IHT strategies designed to protect your wealth and create lasting legacies.
If you’re ready to take the next step, schedule a consultation with us today. Our experienced advisors are here to guide you through the intricacies of IHT planning with clarity and care.
