Inheritance Tax (IHT) is applied to an estate of an individual on death. IHT may also be charged on certain lifetime gifts and transfers.

Some estates do not have to pay IHT because there are valued below the Nil Rate Band (NRB) threshold (currently frozen at £325,000 until April 2018) or because certain reliefs and exemptions apply. IHT is charged at 40% on the balance of the taxable estate or at reduced rate of 36% if 10% or more of the net estate is given to charity.

Gifting surplus assets away is frequently used as a strategy to mitigate potential IHT liabilities, either by making outright gifts or by gifting into trusts.

While an outright gift may be more straightforward it is not always the most suitable form of gift. For example, a parent may wish to set funds aside for their children but may not want them to have full access to the funds until they are sufficiently mature. In these circumstances a trust can provide an effective tool to balance tax efficiency whilst allowing them to regain a level of control over how the estates are managed within the terms of the trust, as set out in the trust deed.

Another way of dealing with a potential IHT liability is to take out a Life Assurance policy to pay out on the death of the life assured. This can be used by the beneficiaries as a pot to pay all or part of the IHT liability. In addition to mitigating any potential IHT liability, the process of probate (winding up the deceased estate) can often be a long, complex and expensive one at an already difficult time for the family. Using a trust will also allow the beneficiaries to gain access to the funds quickly as the proceeds of the policy do not have to go through probate.

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