Inheritance Tax Planning in Warwick & Warwickshire
Understanding Inheritance Tax (IHT)
Inheritance Tax (IHT) is a tax on the transfer of wealth from one person to another. It most commonly arises when someone passes away and their property (known as their estate) is passed on to beneficiaries. However, IHT can also apply during a person’s lifetime if they transfer assets, whether as an outright gift or by placing them into a trust.
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Basic Principles of IHT
At its core, IHT is based on the concept of a transfer of value. This occurs when a person’s estate becomes worth less as a result of a decision or action they take—typically by making a gift. The law (Inheritance Tax Act 1984, s.3) defines a transfer of value as a “disposition,” which usually means a gift made out of generosity.
A disposition can include:
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The transfer of assets on death
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Lifetime gifts of money, shares, property, or other assets
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Transfers of property into trust
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Gifts with reservation (where ownership is given away but some benefit is retained)
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Distributions of trust assets to beneficiaries
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Rates of IHT
There are four main inheritance tax rates for transfers by an individual:
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0% – within the nil rate band
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20% – on certain lifetime transfers, such as gifts into trusts
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40% – standard death rate on chargeable estates above the nil rate band
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36% – reduced rate where at least 10% of the estate is left to charity
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Nil Rate Bands
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The nil rate band (NRB) is the tax-free threshold, currently £325,000. Transfers up to this amount are taxed at 0%.
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Transferable Nil Rate Band (TNRB): Any unused NRB from a deceased spouse or civil partner can be transferred to the survivor, potentially doubling the available allowance to £650,000.
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Residence Nil Rate Band (RNRB): An additional £175,000 (for 2024/25 and 2025/26) may be available when a qualifying residence is left to direct descendants. This allowance is also transferable.
Together, these allowances can significantly increase the tax-free amount that can be passed on.
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Other Reliefs
Certain reliefs can reduce or even eliminate IHT liability:
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Business Property Relief (BPR): Applies to qualifying business assets
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Agricultural Property Relief (APR): Applies to farmland and agricultural property
These can reduce the value of chargeable transfers to nil, lowering or removing tax due.​
Key Considerations for Drafting an IHT-Efficient Will
Creating a well-drafted Will is essential for maximising tax efficiency and ensuring that your wishes are carried out effectively. Some important considerations include:
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Maximising the Nil-Rate Band (NRB)
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The NRB is £325,000 for the 2024/25 and 2025/26 tax years, transferable between spouses/civil partners.
Drafting should use formula-based clauses rather than fixed sums, to account for future changes in the NRB and ensure the right beneficiaries benefit.
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Utilising the Residence Nil-Rate Band (RNRB)
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The RNRB is £175,000 (2024/25 and 2025/26) and applies when a main residence passes to direct descendants.
Downsizing relief allows the benefit to continue even if the property has been sold before death, provided proceeds are left to descendants.
Drafting must specify that the residence (or its proceeds) passes to qualifying beneficiaries to secure the relief.
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Charitable Gifts and the Reduced IHT Rate
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Leaving at least 10% of the estate’s baseline amount to charity reduces the IHT rate from 40% to 36%.
The Will should clearly state charitable gifts and their source to ensure the reduced rate applies.
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Avoiding Gifts with Reservation of Benefit (GWR)
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Gifts where the donor retains benefit (e.g., living rent-free in a gifted property) remain taxable as part of the estate.
To avoid GWR, the donor must either relinquish all benefit or pay full market rent if continuing to use the asset.
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Lifetime Gifts and the Seven-Year Rule
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Lifetime gifts are generally exempt if the donor survives seven years after making them.
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If death occurs within seven years, the gifts may become taxable, with taper relief reducing the tax after three years.
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The NRB is applied first to lifetime gifts in chronological order before applying to the estate.
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Clarity in Drafting to Avoid Disputes
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Ambiguities in Will wording can lead to disputes. For example, in Loring v Woodland Trust [2015], a clause referencing the NRB was interpreted to include the transferable NRB, unexpectedly increasing the gift.
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Precise, professional drafting avoids such risks and ensures the testator’s intentions are respected.
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Clear, careful planning can help preserve wealth for future generations, minimise tax liabilities, and prevent costly disputes.
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We provide expert advice on both estate planning and Will drafting, ensuring your arrangements are legally sound, tax-efficient, and aligned with your wishes.