Are you a member ?
Home > Tax Articles > Capital Taxes > Inheritance Tax Mitigation: The Basics
Inheritance Tax Mitigation: The Basics Print E-mail
User Rating: / 1
Share on Facebook

In the first of a series of extracts from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton provides an overview of inheritance tax (IHT) and the subject of IHT mitigation. 

Overview of the Chapter - and the Subject

A Brief Perspective

In 1986 IHT replaced Capital Transfer Tax (CTT), which itself had taken the place of Estate Duty in 1975. Estate Duty was primarily a death duty, but also caught certain lifetime gifts made within seven years before death (as indeed does IHT). The introduction of CTT sent shockwaves through both the professions and the public at large, in combining a genuine lifetime gifts tax with a death duty, together with a comprehensive regime for taxing discretionary trusts. However, the introduction of the Potentially Exempt Transfer (PET) with IHT in 1986 went some way to mitigating the burden of the gifts tax. That year saw also the introduction of the Reservation of Benefit (GWR) regime, a revival from Estate Duty, in an attempt to prevent a taxpayer in making a lifetime gift from ‘having his cake and eating it’.

A variety of successful attempts to get round those GWR rules, as upheld in the courts, led to some piecemeal tinkering with the regime before the introduction of the Pre-Owned Assets (POA) Income Tax from 2005/06. The POA regime imposes an Income Tax charge on donors of land, chattels or ‘settled intangibles’ who had managed successfully to circumvent the GWR rules while still enjoying a benefit from the asset given away. And then, in 2006, what was presented as the ‘Inheritance Tax Alignment for Trusts’ was in substance a concerted attack on both non-discretionary trusts existing at 22 March 2006 and new lifetime trusts, by making it generally rather more expensive in IHT terms to hold assets in trust than to hold them beneficially. While the full consequences of this are still becoming clear as the impact of FA 2006 works its way through the system, the new regime quite evidently does not spell the death of trusts (as explored in Chapters 3 and 4).

This core Chapter of the Book surveys in brief the avenues down which a person wishing to mitigate the burden of IHT might walk, with most of those topics to be expanded in subsequent Chapters. First, however, it is worth saying something about the scheme of IHT as a whole as we now have it in IHTA 1984 (renamed in 1986 from the original Capital Transfer Tax Act 1984) and, for the GWR regime, FA 1986. IHT having been introduced as a ‘new’ tax, albeit subject to some subsequent amendments, the scheme of the Act generally follows a fairly logical order.

The Main Charges and Definitions

(a) Transfers of Value and Chargeable Transfers

IHT is charged on the value transferred by a ‘chargeable transfer’ (IHTA 1984 s 1), which is a ‘transfer of value’ made by an individual except an ‘exempt transfer’ (IHTA 1984 s 2(1): see 2.1.5 and 2.2). A transfer of value is a disposition made by a person which causes the value of his estate immediately after the disposition to be less than the value immediately before it (IHTA 1984 s 3(1)) but, in this, no account is taken of ‘excluded property’ (IHTA 1984 s 3 (2)).

(b) Excluded Property

Excluded property is, generally,

(i) property situated outside the UK owned by someone domiciled outside the UK, both under the general law and for IHT purposes (IHTA 1984 s 6(1));

(ii) a reversionary interest (except where owned by the settlor or his spouse/civil partner) to the type of life interest in a settlement which is taxed as if the beneficiary owned the underlying property - a so-called 'estate' interest in possession (IHTA 1984 s 48(1)); and

(iii) property in a settlement situated outside the UK where the settlement was made by someone domiciled outside the UK for IHT purposes when made (IHTA 1984 s 48 (3)).

Categories (i) and (iii) represent the territorial limitation on the operation of IHT: see 2.12.

TAX TIP: An individual who is prospectively entitled under a settlement, that is on the death of the current beneficiary who has a qualifying interest in possession, could give away his interest under the settlement (called a ‘reversionary interest’) with no IHT consequences (even if he were to die the following day, i.e., as excluded property he will not have made a PET). Nor indeed will there be any CGT implications, assuming that the settlement has always been UK resident and he did not acquire his interest for value (TCGA 1992 s 76).

(c) Potentially Exempt Transfers and Chargeable Transfers

Accordingly, the tax looks for chargeable transfers, whether made during lifetime or on death, and taxes them. However, there is a significant category of lifetime chargeable transfers, as PETs, which are transfers of value (of whatever amount) made by an individual to another individual, or into a trust for a disabled person, which are assumed to be exempt when made and do not become chargeable except in the event of the transferor’s death within seven years (IHTA 1984 s 3A). Such treatment was, before 22 March 2006, also extended to a gift into trust in which an individual had a right to income (interest in possession) – called a ‘qualifying interest in possession’, the legislative expression for an 'estate' interest in possession - or into a favoured accumulation and maintenance trust for children (see 2.3.3(c)).

In the case of a chargeable lifetime transfer, whether immediately chargeable, e.g., a gift into trust (generally, of whatever kind on or after 22 March 2006) or a PET which becomes chargeable by reason of death within seven years, the rate of tax charged will be 40% unless the amount of the chargeable transfer falls within the transferor’s Nil-Rate Band (£325,000 for 2009/10 and 2010/11), in which case the rate will be 0%. The rate of IHT on an immediately chargeable lifetime transfer is 20% to the extent that it exceeds the Nil-Rate Band as reduced by chargeable transfers made within the previous seven years (IHTA 1984 s 7). If death follows within seven years of this new chargeable transfer the rate is increased to 40%, with a credit for any tax already paid. The Nil-Rate Band is given according to the order of gifts within a seven year period. In the case of gifts made on the same day it is allocated pro rata.


For the last five years Belinda has made gifts of £3,000 per annum to a favourite God-daughter, effectively using her £3,000 Annual Exemption (see below) in each year. Otherwise she has made gifts as follows:

  • on 1 July 2005 £125,000 to her son (with no chargeable transfers in the seven years before that). This was a PET and even if Belinda dies within the next seven years will not attract IHT;
  • on 1 March 2007 £250,000 into an accumulation and maintenance settlement for her grandchildren. Again, this was a PET when made. Provided that Belinda dies at a time when the Nil-Rate Band is no less than £375,000 (the sum of the gift to the son and the gift to the A&M trust) there will be no further IHT to pay; and
  • on 1 January 2009 £75,000 to her daughter. This was also a PET, but should Belinda die when the combined total of that plus chargeable transfers made in the previous seven years exceeds the then Nil-Rate Band, for example on 1 November 2010 (tax year 2010/11, when the Nil-Rate Band is £325,000), the excess viz £125,000 will attract IHT at 40% of £50,000, whether the IHT is paid by Belinda’s daughter or by Belinda’s executors. 

TAX TRAP: A PET which becomes chargeable on death within seven years may trigger IHT which could have been avoided if there is a surviving spouse/civil partner, by letting the value in excess of the Nil-Rate Band fall into exempt residue and having the survivor make a PET in the hope of survival for seven years. The moral: always when planning a PET consider the impact of death within the following seven years.


(a) The Deemed Transfer of Value

On death the deceased is treated as if immediately before he died he had made a transfer of value equal to the value of his estate immediately before his death (IHTA 1984 s 4(1)). The estate includes all the property to which he is beneficially entitled (IHTA 1984 s 5). This will include certain, but not all, interests in possession under a trust (see 2.3.3). Liabilities may be deducted provided either they were imposed by law or were incurred ‘for a consideration in money or money’s worth’. Such a deemed transfer of value on death may be exempt, for example on passing to a surviving spouse/civil partner or to charity, or it may be chargeable. If chargeable it may be subject to a relief at either 50% or 100% for qualifying business and agricultural property or, to the extent that the chargeable value exceeds the prevailing Nil-Rate Band (£325,000 in 2009/10, 2010/11 and up to and including 2014/15), it will attract tax at 40%. Any balance of the Nil-Rate Band not taken up by chargeable transfers made in the seven years before death will reduce the IHT otherwise attracted by chargeable transfers on death. Where with a married couple or registered civil partnership all or part of the Nil-Rate Band on the first death is unused, the unused proportion can augment (up to 100%) the Nil-Rate Band on the death of the survivor after 8 October 2007 (see 18.4.3) – the so-called ‘Transferable Nil-Rate Band’.

(b) Changes Occurring on Death

A person’s estate may be subject to changes which occur on account of the death. Where such a change is an addition to the property in the estate, or an increase or decrease in value of any such property, such changes are treated as if they had occurred before the death (IHTA 1984 s 171). Expressed exceptions to this principle are alterations in the capital of a close company within IHTA 1984 s 98 and the passing of an interest by survivorship under a joint tenancy. This means, for example, that a decrease in the value of the pre-death property which is triggered by the death, for example personal goodwill in a sole trade which dies with the deceased (albeit otherwise attracting business property relief), is excluded from the death estate. 

A similar candidate might be an option over property which comes to an end on death. That was the argument raised by the executors of Mr McArthur in relation to options to convert unsecured loans to two companies to £1 ordinary shares at par. The effect of exercise of the options immediately before death (or before) would have been to create a majority holding in the companies neither of which attracted Business Property Relief. The Special Commissioner agreed with HMRC and held that both the loans and the related conversion rights or options were valid, subsisting and enforceable immediately before the death (McArthur’s Executors v RCC [2008] SSCD 1100 (SpC 700))

TAX TIP: Be sure, in advising on estate planning, to identify the existence of any options (especially in relation to shares in companies which do not attract Business Property Relief) which have a value and take steps accordingly. At least, in the McArthur case mentioned above, the exercise of the options after his death (within whatever was the permitted period) would have occasioned an increase in the value of the shares.

(c) The Estate Duty Surviving Spouse Exemption

Where Estate Duty was paid (or would have been payable but for reliefs or the threshold) on the death before 13 November 1974 of the first spouse to die and the survivor has a life interest under the Will, no IHT is chargeable on the second death (IHTA 1984 Sch 6 para 2). However, the related property rules may affect the chargeable value of the free estate or other property taxed on death.

Note that there will also be no IHT implications arising from an inter vivos termination of the life interest (even if death follows within seven years), though in that event the CGT-free uplift on death would have been wasted.

A claim to the Estate Duty transitional relief failed in circumstances where the estate of the husband (who died in 1969) was left to the wife outright. She vainly tried to argue that there was a legally enforceable secret trust under which on the wife’s death the property in question would be left to their two daughters. The First-tier Tax Tribunal (Judith Powell) held that there was no evidence for that argument, nor indeed for the alternative assertion that the 1965 Wills made by the spouses were mutual Wills, so that on the husband’s death the widow held the relevant property on a constructive trust for the daughters (Davies and Rippon (Goodman’s Executrices) v RCC [2009] UKFTT 138 (TC 106)).

TAX TIP:  An ‘Estate Duty protected life interest’ should be kept in place until the death of the survivor. The fund will be free from IHT and the acquisition cost of the assets will be market value, with the CGT-free uplift in value on death.

Dispositions Which are Not Transfers of Value

There are some dispositions which on the ‘estate before less estate after’ principle reduce the estate but are not transfers of value, viz.:

  • those not intended to confer a gratuitous benefit, provided either they were made in a transaction at arm’s length between unconnected persons (e.g., a ‘bad bargain’ to other than a member of the family) or they were such as might be expected to be made in an arm’s length transaction between unconnected persons (IHTA 1984 s 10);
  • dispositions for the maintenance of the family (IHTA 1984 s 11). A member of the family includes a spouse/civil partner, an ex-spouse/civil partner and a child (including a step-child and an adopted child). A disposition will not be a transfer of value if made to a spouse/civil partner or a child of the transferor or spouse/civil partner which is either for maintenance or, where for a child, for maintenance, education or training up to the age of 18 or later cessation of full-time education or training. The disposition may take the form of a transfer of capital (see 13.2.1 and McKelvey v HMRC [2008] SSCD 944 SpC 694);
  • a disposition which is allowable in computing profits or gains for Income Tax or Corporation Tax or, specifically, a contribution under a registered pension scheme (IHTA 1984 s 12);
  • a disposition of property made to trustees by a close company for the benefit of its employees (IHTA 1984 s 13);
  • the waiver or repayment of remuneration to the extent that it would be taxable employment income (IHTA 1984 s 14);
  • a waiver of dividends within twelve months before the right accrues (IHTA 1984 s 15);
  • the grant of an agricultural tenancy in the UK, Channel Islands or Isle of Man if for full consideration in money or money’s worth (IHTA 1984 s 16); or
  • certain post-death variations or disclaimers or transfers on ‘precatory trusts’: see 2.13 and Chapter 19 (IHTA 1984 s 17).  So, for example, a written variation or disclaimer by the original beneficiary of an inheritance under a Will or an intestacy, made within two years after the death, is treated as if it were made by the deceased under his Will (IHTA 1984 s 142).

These provisions protect only an inter vivos disposition from being a transfer of value. That is, for example, a gift under a Will for the maintenance of a member of the family (other than a spouse, which is exempt) will be a chargeable transfer, whereas had it been made by the individual on his deathbed, it might not have been a transfer of value at all: see the second bullet above for s 11.

Exempt Transfers

The basic lifetime exemptions are dealt with at 2.2: viz. the £3,000 Annual Exemption, the £250 Small Gifts Exemption, the normal Expenditure out of Income Exemption and Gifts in Consideration of Marriage. The two main exemptions which apply to both lifetime gifts and gifts on death are as follows:

  • transfers between spouses/civil partners (IHTA 1984 s 18). Where the transferee spouse/civil partner is, but the transferor spouse/civil partner is not, domiciled in the UK for all IHT purposes (see 15.3 and 16.4), the exemption is limited to £55,000, on a lifetime basis; and
  • the charities exemption, which depends on the definition in the Income Tax Acts (IHTA 1984 s 23 and s 272), originally a UK registered charity, though following a recent ECJ decision the UK tax reliefs have been extended to charities within the EU, Norway and Iceland.

There is also a minor exemption for both lifetime gifts and gifts on death to gifts to political parties (IHTA 1984 s 24). To qualify, at the last General Election, either at least two members of the party must have been elected to the House of Commons or one member elected and not less than 150,000 votes cast for candidates who are members of the party.

Gifts to the National Trust, etc., (including Government Departments) are exempt (IHTA 1984 s 23: see IHTA 1984 Sch 3 for the list of bodies).

Certain transfers of value are ‘conditionally exempt’, broadly where of national heritage property or where such property is offered in lieu of IHT or CGT (IHTA 1984 s 30-s 35A).  This is considered in more detail in Chapter 14: see also 2.11 for a summary. [ See also Jennifer Adams' article from earlier this year - A Guaranteed Exemption - Ed. ]

There is a complete exemption from IHT for the estate of a member of the armed forces who dies on active service against an enemy – or from a wound inflicted, accident occurring or disease contracted at that time (IHTA 1984 s 154). Traditionally, the exemption is construed favourably by HMRC (in relying on an assessment from the Ministry of Defence) and there is no time limit on the period elapsing between the date of the wound, accident or disease and the death.


A transfer of value may be a chargeable transfer, though in computing the value transferred it may attract a relief. The principal reliefs (whether given at 100% or at 50%) are for qualifying business and agricultural property, considered at 2.5 in summary and at 6.2 and 7.2 in more detail (IHTA 1984 ss 103-113B for Business Property Relief (BPR) and ss 115-124C for Agricultural Property Relief (APR)).

A very limited deferral relief is given to woodlands insofar as they do not attract relief as agricultural or business property (IHTA 1984 ss 125-130): see 7.4.

A relief called informally ‘Quick Succession Relief’ or QSR is given where property is subject to two or more chargeable transfers within a five year period (IHTA 1984 s 141), the second or latest transfer occurring usually on death. In that event the tax chargeable on the second transfer is reduced by a percentage of tax charged on the first, on a sliding scale depending upon the period elapsing between the two transfers: see 18.1.2.

A particular relief (albeit not expressed as such) is given on post-death events (considered in more detail at 2.13.2 and in Chapter 19). For example, where a Will creates a ‘relevant property’ trust, an appointment by the trustees within two years after the death escapes the normal ‘exit’ charge (IHTA 1984 s 144).

Relief may be given under a double tax treaty or, as ‘unilateral relief’, where in the absence of a treaty, tax similar to IHT is charged on the asset in that jurisdiction (IHTA 1984 ss 158 and 159).


There are two main regimes for settled property, with a third, minor, regime, all of which are discussed at 2.3 and in more detail throughout Chapters 3 and 4.  


With the introduction of IHT in 1986 came the ‘Reservation of Benefit’ or ‘GWR’ rules, inherited from Estate Duty (FA 1986 s 102 and Sch 20). In broad terms, if when a person dies he is enjoying a benefit from something he has given away since 18 March 1986, that asset is treated as forming part of his chargeable estate. If the benefit ceased during his lifetime he is treated as having made a PET, so that if more than seven years elapsed after the cessation of benefit there are no IHT implications. If the benefit ceased within the seven years before his death, it is treated as a chargeable lifetime transfer. See 3.2.2.

Following well-publicised successful attempts by taxpayers to devise ways around the GWR regime, such that they would continue to enjoy the benefit of the gift while having made an effective transfer for IHT purposes, the draconian Pre-Owned Assets (‘POA’) regime was introduced from 2005/06 (FA 2004 Sch 15). The charge applies where (subject to certain exclusions) a person enjoys some benefit from land or chattels which he has given away and which do not form part of his estate either under general principles or under the GWR rules. In that case, subject to an annual de minimis of £5,000 of value per taxpayer, the value of the benefit attracts Income Tax each year. A POA charge also arises where an intangible asset (e.g., cash or shares) is comprised in a settlor-interested trust. There is then an annual Income Tax charge on 4.75% (for 2009/10) or 4.00% (for 2010/11) of the market value of the trust property. See 3.2.3 for more detail.

The DOTAS regime is to be extended to cover the avoidance of IHT through trusts: HMRC issued a consultation document on 27 July 2010.

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

Hutton on Estate Planning - 3rd Edition

Established in September 2008, Hutton on Estate Planning - 3rd Edition is the ideal way for private client practitioners to keep up-to-date with developments in a fast moving world.

The electronic text will be available mid-September 2010, with the printed book ready for despatch in mid-October. Updates are made to the electronic text at least monthly and subscribers are notified by email of the changes, which are carried in the text in a second colour.

Clearly set out, with well-defined sections and paragraphs, including worked examples and tips and traps, this publication with its regular updating is the only one of its kind in the market place.

Comments made by reviewers include:

'Hutton on Estate Planning is impressive in structure and rich in content …  The Book is expertly written to a high technical level. As an author myself, I can testify that a good deal of expertise is required to deliver this degree of technical detail in such short, concise paragraphs. Comprehension is made relatively easy, and in addition the author explains often complex tax provisions very clearly and succinctly.' Mark McLaughlin, STEP Journal March 2009

'The e-Book is a well designed and useful aid which offers significant additional advantages over traditional hard copy. In a crowded market place it usefully fills a niche. I would thoroughly recommend it to the practitioner.'  Sharon McKie of McKie & Co (Advisory Services) LLP, Private Client Business January 2009

'I love the sub-title Practical Solutions to Today's Problems as this highlights the approach Matthew has adopted throughout the Book. If I were still involved in the provision of tax advice myself this is one Book I would want on my shelf. More than that I would also want to be able to access the e-Book version too.' Mark Lee, Chairman of the Tax Advice Network

Subscriptions run for 12 months from 1 October 2010, though subscriptions placed in September will secure access to the eBook as soon as it is available, anticipated to be Friday 17 September. The subscription price depends upon the number of subscribers each of which has their own password and includes a copy of the printed book. The cost of a 12-month subscription for up to 10 Users is just £199 plus VAT plus £5 p&p.
Have a look at, including a sample chapter, and either order online or through This e-mail address is being protected from spambots. You need JavaScript enabled to view it


Matthew Hutton is running, for the 9th successive year, his Estate Planning Conference in three venues over Autumn 2010.

Topics to be covered: Capital Gains Tax – Looking Forward from 22 June; Trusts; Wills and Deceased Estates; The Foreign Element; The Family Business, The Family Farm, Compliance Issues, Problem Question and Discussion; And the Rest …

With very detailed Notes, the Conference aims to be ruthlessly practical. There are two dedicated question and answer sessions during the day, with an opportunity to raise questions both in advance and at the end of each session.

With six hours of CPD on offer, attendance at this Conference will enable you to be confident of being right up-to-date in advising your clients in the light of recent developments in the legislation, case law, HMRC practice and within the professional domain.

Testimonials from the 2009 series of Conferences include:

'Valuable and comprehensive annual update which consolidates MTR updates – my first resource for knowledge' Caroline Wallace of Boyes Turner

'Very relevant issues and extremely well presented as always' Joan Usher of Grant Thornton UK LLP

'An extremely thought-provoking Conference which is excellent value for money' Robert Fearon of Robert Fearon & Co

Recommendation by Mark McLaughlin, Managing Editor, TaxationWeb

'As a delegate of Matthew Hutton's Estate Planning Conference in previous years, I have always found both the lectures and the supporting notes to be comprehensive and informative. Matthew Hutton is an accomplished and highly experienced capital taxes specialist, who these days devotes his time to writing and lecturing. His combination of in-depth knowledge and practical insight is reflected in the very high standard of his lectures. He is a very polished speaker who clearly pays close attention to the needs of his audience, and it shows through the popularity of his Conferences, which also represent excellent value for money. I have no hesitation in recommending the Estate Planning Conference to practitioners with an interest or involvement in this area'.


EAST – Wednesday 29 September, Bedford Lodge, Newmarket CB8 7BX

WEST – Wednesday 13 October, Aztec Hotel, Almondsbury, nr Bristol BS36 1RP

LONDON – Tuesday 19 October, Bloomsbury Hotel, Great Russell Street, London WC1B 3NN


£300 + VAT per delegate, subject to discounts Visit, Conferences & Seminars, Matthew Hutton Conferences, to access a brochure and to submit a request for a delegate place online. Alternatively email: mailto: This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call 01508 528388 quoting TaxationWeb.   

Only registered users can write comments!

About The Author

Matthew Hutton MA, CTA (fellow), AIIT, TEP
Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

Article Added Saturday, 11 September 2010 | 4403 Hits


Your attention is drawn to the disclaimer on this site, which applies to the content in this section. The content is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, neither the author nor TaxationWeb Ltd. can accept responsibility for any action undertaken or refrained from as a consequence of this material.

Watch Now

"Why Accountants need an App"

Latest video from


Tax Books


Tax Planning for Farm and Land Diversification, 3rd Edition

Tax Planning for Farm and Land Diversification offers practical help and guidance to ensure that farmers and landowners take full advantage of tax planning opportunities.


A-Z of Plant & Machinery (2014-15 edition)

An analysis of more than 250 types of common expenditure, showing whether or not they qualify as plant or machinery. Each entry includes statutory and case law references, together with HMRC guidance and the authors? personal commentary.
Tax Planning 2014/15

Tax Planning 2014/15 covers the many situations and tax planning opportunities that practitioners encounter everyday when dealing with their clients? tax affairs. This book is full of easily implementable technical suggestions and advice.
Tax Chamber Hearings: a User's Guide (3rd edition)

A clear, practical guide to the procedures involved when a taxpayer takes an appeal to the Tax Chamber at the First-tier Tribunal.
Employee Benefits & Expenses: 2-volume bundle

Clear, practical commentary on the taxation of employee benefits and expenses, across two volumes, with a discounted price when both books bought together.
Hitwise Award Winner Apr-Jun 2008 Hitwise Award Winner Jul-Sep 2008 Hitwise Award Winner Oct-Dec 2008 Hitwise Award Winner Jan-Jun 2009 Hitwise Award Winner Jul-Dec 2009 Hitwise Award Winner 2011 Alexa - Most popular news and media website

TaxationWeb Limited (Registered in England No. 4571386), 6 Coleby Avenue, Peel Hall, Manchester, M22 5HH, United Kingdom

By using this website, you agree to using cookies. Cookies are small text files stored on your browser when you use websites and applications (learn more about cookies).
You can control how websites use cookies by configuring the privacy settings within your browser (please refer to your browser help function to learn more about cookie controls).
Note that if you disable cookies entirely, there are parts of this website which may not function properly (e.g. logging in, commenting, etc).

Website by Dorifor Internet Marketing