Category Archives: Financial Planning Week

Claire Trott, Financial Planning Week tip: Maximising pensions tax reliefs using carry forward

With the deadline for the Mandatory Pension Savings Statements being this month (6 October) it is now that you can calculate what your clients’ available annual allowance is because the information should now be to hand.

The basics

Carry forward allows clients to utilise unused annual allowances from the previous three tax years. You must first use the current tax year fully and then use the oldest tax year next and so on. The important thing to be sure of is that the client has enough, not necessarily to get too hung up on which year it is used from at this point in time. Exceeding the annual allowance including carry forward will mean tax charges, designed to recoup tax relief given. The tax charge is payable by the member, even if contributions have been paid entirely by the employer.

If total contributions do not exceed the annual allowance including carry forward then there is no need to declare this on a tax return, only contributions in excess of this need to be declared in the pension tax charge section of self assessment. However, for those contributing to a relief at source pension scheme, who are higher or additional rate tax payers they will need to ensure they claim any extra tax relief due. This should be done even if they exceed the annual allowance so as not to be unfairly penalised.


We have to remember that not everyone is eligible for carry forward, they must have been a member of a scheme in the years in which they are carrying forward unused annual allowance.

This doesn’t just mean a contributing member, but also anyone with a deferred pension scheme, such as an old final salary pension or even a contracted out rebate scheme for instance.

But if this is their first pension contribution ever, then carry forward isn’t available. In additional, if the client is subject to the money purchase annual allowance then carry forward is only available in relation to defined benefit accrual.


The annual allowance is a test on total pension contributions including personal tax relief received by the scheme and employer contributions, and therefore when carrying forward the annual allowance from the previous three years it increases the total amount of pension contributions that can be paid within the current tax year. What it doesn’t do is bring forward unused tax relief, so for personal contributions there is a limit on the amount of tax relief available equal to £3,600 or 100% of relevant UK earnings within the current tax year. This means that for many they will have significantly more available annual allowance than they can pay with personal contributions alone.

It is important to remember in addition that carry forward isn’t limited by the clients earnings in previous years, so if they had earnings of £20,000 and paid a £10,000 gross personal contributions with no employer contributions then £30,000 carry forward would be available.

Tapered annual allowance

Pension savings statements or contribution histories provided by schemes will not take into account the tapered annual allowance. Schemes are not responsible for this calculation because they do not have sufficient information to do the calculations. Therefore, it is important to fully understand the client’s income, including in previous years. If the tapered annual allowance applied in previous years, it is this figure that will be used in the carry forward calculations, not the standard annual allowance


There are many moving parts when dealing with tax relief on pension contributions which are important to understand. My colleague Chris Jones provided some tips earlier in the week on “Making the most of pensions tax relief ahead of another Budget” which covers many of these complex aspects and so worth a read.

Tony Wickenden, Financial Planning Week tip: Capital gains tax change. Will he? Won’t he? And where does it leave you?

As we approach 27 October and our second Budget of 2021, questions will inevitably emerge over the future of capital taxation. Apart from the frozen inheritance tax (IHT) thresholds and the frozen capital gains tax (CGT) exemption there has been very little change proposed. And yet both IHT and CGT have been reviewed and reported on (two reports for each tax) by the Office of Tax Simplification (OTS). The last of those reports, on ‘simplifying practical, technical and administrative issues’ related to CGT was published in May 2021, two months after the Spring Budget. It is CGT that we will examine in this bulletin. 

Ahead of that last Budget, on 3 March, many advisers received questions from clients concerned about the future of CGT and what, if any, advice should be considered and/or action be taken. A repeat of this pre-Budget pattern is likely – especially as no material changes to capital taxation were announced in March.

So, what is the advice and recommended action this time around? A tough question – but we’ll try to answer. First let’s consider some background and context:

  1. The proposals from the first and second OTS reports on CGT that gave rise to the greatest concerns were:

    a. Capital gains rates should be ‘aligned more closely with Income Tax’ but with a reintroduction of some form of inflationary relief so that only “real” gains are taxed and with a possible “rebasing” of acquisition value to an appropriate date  to help diminish possible “tax pain” for long held assets;
    b. A reduction in the annual exempt amount to ‘a true de minimis level …in the range between £2,000 and £4,000’;
    c. A review of Business Asset Disposal Relief (formerly entrepreneurs’ relief); and
    d. Removal of the tax-free re-basing of acquisition value on death for all chargeable assets.
  2. Total receipts for CGT in 2020/21 were £10.6bn – so not huge, but double the level of IHT for the same period.
  3. The numbers of individuals who paid CGT in 2019/20 were not large either- around 250,000. In addition, 18,000 trusts paid the tax.
  4. The Conservative Government is coming under strong pressure from the backbenches over the tax and national insurance (NIC) increases they have already proposed. Many in the party are keen that the Conservatives are clearly identified as the Party that stands for fiscal responsibility and low taxation, not obvious traits of their leader.

So, what might all of this mean for the likelihood of material CGT reform being introduced in the upcoming Budget? As the above context demonstrates there are plenty of “moving parts” and “contributory factors” to consider.

Here’s what we think supports CGT changes (pros) and also what makes change less likely (cons):


  1. The perception of fairness in selecting who bears the largest burden of tax increases is politically important. Those who pay CGT are likely to be the richer members of society with the ‘broadest shoulders’.
  2. Relatively few people pay CGT and so making the tax tougher and increasing the yield might not have a high political cost. 2019/20 data show that just 11,000 individuals accounted for two thirds of all taxable capital gains, with an average gain of about £3.8m.
  3. The current Chancellor specifically asked the OTS to review and report on CGT.
  4. Taxing capital gains as income is nothing new – we have “been there before” so to speak. It was generally the “way of it” up until 2008 and was last introduced by a Conservative Chancellor (Nigel Lawson). Taxing gains as income has also been a popular proposal from many think tanks for some years.
  5. If the yield from the tax were doubled by charging gains at closer to income tax rates, then an extra £10bn a year would be helpful.
  6. The likelihood that there will be no “one-off” or annual “wealth tax” or “covid recovery” tax maybe makes a more fundamental review of CGT (and IHT) more likely. It has the political benefit for the Chancellor of also appearing to be tax on wealth. CGT can be changed almost instantly (remember June 2010 – please see below) and legislation does not have to be built from scratch, as would be the case with a wealth tax.
  7. The Treasury Select Committee stated recently that there is a “compelling case for a review of capital taxation”.


  1. The concern over backbench and conservative voter “revolt/anger” which would be damaging for unity.
  2. The relatively low yield that the OTS-proposed CGT changes would generate.
  3. Behavioural factors would have a considerable impact on the extra tax raised. Gains only attract tax on disposals, so these may be deferred, and, for example, loans taken instead. The OTS noted that ‘alignment of Capital Gains Tax rates with Income Tax rates could theoretically raise an additional £14 billion a year …[but]… it is clear that nothing like this amount would be raised in practice, due to behavioural effects.’
  4. The lesson of additional rate tax would doubtless be exhumed.
  5. The additional yield (apart from the likely behavioural changes) is strongly linked to potentially volatile values – so inherently uncertain. For example, CGT receipts fell by nearly 70% between 2008/09 and 2009/10 in the wake of the financial crash.

Apart from the inherent uncertainty (foolhardiness even!) of predicting anything ahead of a Budget, where does this context and these pros and cons leave us? Well, call it sitting on the fence, but the matter seems very finely balanced. Too close to call even. On balance though, there is enough to lead to a conclusion that whilst change is not inevitable, it absolutely can’t be ruled out. In other words, it would be difficult, in all consciousness, to argue capital taxation will remain as it is. 

So, with that in mind, what if any, action should be considered ahead of the Budget?

Before considering that, though, could any change, say to tax capital gains as income, be implemented other than at the beginning of a new tax year, e.g. from midnight on 26 October? The better view is that it could: George Osborne increased the CGT rate by 10% for higher and additional rate taxpayers at midnight on Budget Day in June 2010. Would, there be a need for consultation? That is certainly possible, especially if radical capital tax reform incorporating CGT and IHT is the chosen way forward – don’t forget those OTS reports!

If that were the case then, even though the final shape of the tax would not be known, anti-forestalling provisions could be announced so that any changes are applied to certain transactions (most obviously disposals) after the date of the announced consultation.

It’s not easy is it?

So, against this unavoidable uncertainty, the one certainty is that change can’t be categorically and confidently ruled out.

So, what action then? Should there be any action? 

Now it gets tricky!

There are “knowns” and there are “unknowns” in relation to the consequences of both action and inaction.

Let’s deal with an easy one first. In relation to a possible removing of “rebasing” on death, it’s unlikely that we are going to see deliberate pre-Budget action (i.e. deaths!) to “forestall” this process and trigger a pre-Budget rebasing!

So, how about pre-Budget disposals to “bank” a gain taxed at 10% or 20%?

That’s the dilemma some individuals found themselves in ahead of the last Budget.

The stronger the perceived likelihood of taxing capital gains as income, and the bigger the unrealised gain, the more appealing a pre-Budget realisation would seem. And there’s the rub. There is no certainty and so “perception” and the nature of the individual will be the key drivers. An optimist or a pessimist? No sane adviser could give a formal recommendation. You can only state the facts (please see above). The “win” if the feared changes come to pass could be material if the gains realised are significant – a potential halving of the tax. If you felt it right to divest on economic, commercial, investment grounds (i.e. you were going to do it anyway) then that will absolutely be the likely way you will go. The main reason for the disposal decision would not be tax-motivated, even if it may yield a tax advantage. In making the decision to disinvest on this basis you will have factored in the tax cost based on the current tax rates. So, two absolute “knowns”. You “know” you want to divest on commercial/investment grounds and you “know” and accept the tax consequences under the current rules. And you may secure a supplementary benefit by divesting and realising a gain before the rates go up.

Where the only reason for considering divestment is the fear of a future tax increase and the “chance” of a “tax win” then you also have to factor in the cost. The “unknown” benefit and the “known” cost. In relation to the latter you have the commercial cost of sale and reinvestment. It is, however, more than arguable that the current “bed and breakfast” anti-avoidance provisions would appear to be capable (as the legislation stands) of getting you “out of a hole” by repurchase within 30 days, so the sale is identified with the recent purchase, minimising the gain or creating a small loss. Interesting.

And then there is the tax cost at the current rates payable in January 2023 (assuming we are not talking about residential property). Harry Callaghan springs to mind. “Do you feel lucky …punk?” Against the knowns and unknowns the decision will be subjective and substantially founded on FOMO (fear of missing out) – one way or another. The adviser can only clarify the context (based on facts) and give the client all they need to make the decision. Of course, if any further “hard” information on the likelihood of change becomes available ahead of the Budget this will need to be factored in. Don’t hold your breath on that though. Leaks have been frequent but not dependable ahead of recent Budgets.

Banking a gain subject to 18% or 28% tax – which primarily applies to residential property – ahead of 27 October, is largely theoretical unless the sales process is already underway. One point to remember in such an instance is that it is generally the exchange date, not the completion date, which determines when the disposal occurs for CGT purposes.

And, to close, on Business Asset Disposal Relief, as for ordinary chargeable assets, if you are going to make a disposal anyway, on commercial/economic grounds and if it’s logistically possible, absolutely complete before the Budget. If you are not in this “advanced” position then manufacturing a solely “tax fear” motivated disposal is probably not practically possible anyway. As for complex contingent disposals, the 2020 Budget provided a warning in the anti-forestalling measures that accompanied the rebranding of entrepreneurs’ relief.

So, there we are. As many of the key facts as we could recall and some thoughts on the thought process that could be adopted before taking or refraining from taking any pre-Budget action.

We hope you found it of use.

Niki Patel, Financial Planning Week tip: The importance of writing and reviewing your will

Historic statistics have shown that a large proportion of the UK population do not have a will, whether this is just because it’s something they have just not got round to doing or whether they find it a sensitive subject. Ensuring that clients have a will which caters for their wishes is really important. In this bulletin we look at some of the main reasons as to why someone should write a will and also ensure the importance of reviewing it if their circumstances change.

Protecting assets

One of the most important reasons for writing a will is to ensure that assets pass to the correct people on death. If someone dies intestate, they risk letting the law decide who should inherit their assets which could be very different from their actual wishes. Even though the intestacy rules are designed to protect the individual’s family, this can still cause several problems especially for those who are not married or in a civil partnership. This is because partners have no automatic rights under the law of England and Wales. Equally for those who are separated but not divorced, their spouse or civil partner would inherit part of the estate on intestacy. Further if there are no close relatives, assets could pass to distant relatives whom the deceased had no intention of leaving assets to, or, if there are no relatives, assets could pass to the Crown!

Tax planning

Prior to the introduction of the transferable nil rate band, in many cases the nil rate band was often wasted on first death by leaving assets to a surviving spouse/civil partner which would otherwise pass exempt. For years many couples relied on the transferable nil rate band rules to ensure use of the nil rate band on second death. That said, given that the nil rate band has remained at £325,000 since 2009/10 and is expected to do so until 2025/26, for some making use of the nil rate band on first death ought to be considered as this reduces the value of the estate on second death which can be beneficial for the purposes of making use of the residence nil rate band and also any growth will be outside of the estate of the second person to die.

The will can therefore be drafted to maximise inheritance tax savings. And, for those who wish to leave assets to charity, if 10% or more of the net chargeable estate is left to charity, the rate of inheritance tax payable on the taxable estate is reduced to 36% instead of 40%.

Ensuring that the will is legally valid

Broadly, for a will to be valid it must be written by an adult, so aged 18 or over and of sound mind, it must be in writing and signed and dated in the presence of two adult independent witnesses. So, it cannot be witnessed by anyone who may be able to benefit under the terms of the will. Currently, due to the pandemic it is possible to remotely witness a will and this will be possible until at least January 2022.

While there is no requirement for a will to be written by a solicitor/legal adviser it is often recommended because they can ensure that it is properly worded to reflect the individual’s wishes and also ensure that it is written in a way to maximise tax savings.

Other considerations

Aside from specifying who should benefit/inherit from any assets, it is important to name who should act as executors. The executors are responsible for dealing with the administration of the estate. This means that they have to complete the inheritance tax account, pay any inheritance tax that may be due and apply for probate, if required. Upon grant they then have the legal right to deal with the assets, so once any debts, taxes, expenses, etc. are paid they can then pass assets on to those who are entitled to benefit under the terms of the will.

If trusts have been created in the will, then, usually, the executors will also be named as the trustees and so will be required to manage and deal with the assets in accordance with the terms of the trust.

In cases where there are minor children, a will can also be useful to name any guardians that should look after the children upon death of the parent(s), otherwise the family courts will decide where the children should go. Equally, a will ensures that such children will be properly looked after, as funds can be set aside for their benefit – usually by including a trust to that effect in the will.

It is also advisable to consider what should happen to any pets, so whether a family member would be prepared to look after them or whether they would go to a particular shelter/home.

A will can also include other wishes, for example what kind of funeral the individual would like, whether they wish to be buried or cremated, whether they would like certain songs played or certain readings read.

Finally, with the popularity of social media, including email, it is advisable to include what should happen to any digital assets within the will.

Reviewing a will

It is really important to review a will whenever circumstances change, for example, if the individual gets married, divorced, becomes a parent or receives an inheritance.

If they already have a will in place and get married or enter into a civil partnership, the will is automatically revoked and so a new will would need to be made. The same rule, however, does not apply if they get divorced or their civil partnership is dissolved. In that case, anything left to the ex-spouse/ex-civil partner in the will would be dealt with as if they had died on the date that the marriage/civil partnership legally ended. This means that any gifts/assets which may have been left to the ex-spouse/ex-civil partner will no longer pass to them, although the provisions in the rest of the will would usually be valid and so could cause unintended consequences where the individual’s circumstances have changed and they wish to redirect assets to other people. Whatever the ex-spouse/ex-civil partner was set to inherit would then be passed on to the next beneficiary who is entitled to it, in line with the terms of the will. If everything had been left to the ex-spouse/ex-civil partner, with no other beneficiaries named, then the estate would be dealt with under the intestacy rules. Therefore, if a will is not updated to reflect a divorce or the dissolution of a civil partnership, the estate might be divided up differently to how it was intended. This could mean that new partners or dependants aren’t provided for.

In terms of actually making changes to a will, this can either be done by codicil – a document changing certain provisions in the will or by writing a ‘new’ will and revoking the ‘old’ will. Ideally, consideration should be given to including a revocation clause in the ‘new’ will setting out that it replaces any earlier will that had been written.


Hopefully, this provides an overview of some of the aspects that ought to be considered in relation to writing and reviewing a will, but, most importantly, clients ought to be aware that it makes it easier for family and friends to sort everything out on death. Without a will the process can be more stressful and time consuming for their loved ones.

Helen O’Hagan, Financial Planning Week tip: Multiple trust planning

When your client creates a discretionary trust it will have its own IHT nil rate band (NRB) which will be used throughout the lifetime of the trust. This is used to calculate the 10 yearly charge commonly called the periodic charge.

The available NRB is calculated at the creation of the trust by looking back seven years and adding up any previous chargeable lifetime transfers (CLTs) that the client made before this new one. These are deducted from the NRB available at the 10 year point. This means that, the NRB for the client’s new trust is the NRB at year 10 less those previous CLT’s.

Tax saving

By creating several trusts over several days your clients are able to take advantage of multiple NRBs, as shown in the following example:

Agnes has just started her IHT planning and this is her first set of gifts. She creates three discretionary gift trusts as follows:

 DateValue of CLT
Trust 1August£150,000
Trust 2September£100,000
Trust 3October£75,000

When the time comes for the calculation of the periodic charge, Agnes’ trusts will have the following nil rate bands to use at the 10 year point:

NRB for periodic chargeLess value of previous CLT
Trust 1NRB at 10 year point£0
Trust 2NRB at 10 year point-£150,000
Trust 3NRB at 10 year point-£250,000

Let us assume the trust funds grow as follows:

 Value of fund at 10 year point
Trust 1£300,000
Trust 2£200,000
Trust 3£150,000

And if the NRB increases to £375,000 at the 10 year point, the periodic charge for Agnes’ trusts will be as follows:

 NRB for trustValue of trustTaxable at 6%
Trust 1£375,000£300,000£0
Trust 2£375,000 – £150,000 = £225,000£200,000£0
Trust 3£375,000 – £150,000 – £100,000 = £125,000£150,000£25,000 x 6% = £1,500

Trust 1 has the full NRB to use at the 10 year point, and, as the value of the trust fund is below this, there is no tax to pay.

Trust 2 has the NRB at the 10 year point less the previous CLT of £150,000, which gives £225,000 of NRB to use against the trust, and, again, as the value of the trust fund is below this, there is no tax to pay.

Trust 3 has the NRB at the 10 year point less the two previous CLTs of £150,000 and £100,000, which gives £125,000 of NRB to use. However, as the trust fund is £150,000, which exceeds this by £25,000, this results in a tax charge of £1,500.

If we compare this with the position if Agnes had just set up 1 discretionary trust the calculation of the periodic charge would be:

 NRB for trustValue of trustTaxable at 6%
Trust 1£375,000£650,000£275,000 x 6% = £16,500

As you can see, creating multiple trusts for your clients can make tax savings for them at the 10 year anniversary for the calculation of the periodic charge.

Beware of the related settlements rules

Under the statutory definition of “related settlements”, contained in section 62 Inheritance Tax Act 1984, related settlements are treated as a single settlement and so would not each have a separate NRB.

For two or more trusts to be related settlements, the settlor must be the same in each case and the trusts must have commenced on the same day.

Make sure when setting up multiple trusts for clients that they are set up on different days and the investment bonds start on different days.

Same day additions

There were anti avoidance measures introduced, which created a new section 62A, which states that trusts will be treated as related if  the value of property in each  trust is increased by a transfer of value on the same day, for example, if assets are added to them on the same day.

When using multiple trusts, your clients ought to set them up on separate dates and ensure that funds transferred into the trusts are paid on different days, on set up and when topping up the trust.


Don’t forget that, if you are setting up loan trusts and gift trusts for your clients at the same time, there is no transfer of value under a loan trust, so set this up first. This will potentially give the client 100% of the NRB for the loan trust and also 100% of the NRB for the gift trust to use at the periodic charge point.

If your clients are using loan trusts in their IHT planning consideration should be given to setting up multiple smaller trusts. This will not only help with the periodic charge point giving multiple NRBs to use, it also gives the client flexibility when it comes to waiving the loans. Under certain provider’s loan plans you can only waive all of the loan. There is no facility to waive part of the loan. If you have multiple smaller plans it gives clients the ability to waive each loan at different times, keeping some if needed for future use.

One last point to note is that, with the extension of the Trust Registration Service, each of the trusts will have to be separately registered with HMRC.

Sarah Walker, Financial Planning Week Tip: Putting protection at the forefront of financial planning

The foundation of all financial advice is built on protection. There is little sense in building a great wealth portfolio on shaky ground. The fuel that powers our ability to build up our investments is often reliant on our ability to generate an income. If the fuel runs out, the vehicle stops moving. Therefore, it is logical to ensure (or should that be insure?) that our client’s income continues to flow, even in the event of them being unable to continue working due to ill health, or as the result of an accident.

How well we cement our client’s ‘foundations’ is dependent on what protection is available to them. Appropriate advice obviously relies upon needs and risks being identified and discussed. However, it is also vital that an in-depth conversation about a client’s health is conducted at an early stage. There is no point in discussing a solution with a client, if the product in question would ultimately be unavailable to them, due to their medical history, or even that of their family.

Conducting detailed research before making a recommendation to a client is extremely important. It ensures that expectations are managed, and this can come in many forms:

  • The premium – will a loading be applied, and, if so, what will the final premium look like?
  • Exclusions – will any be applied to the final underwritten offer issued by the insurer? If so, they need to be discussed with the client before an application is made, to avoid any unwelcome surprises once the underwriting has been completed.
  • Declined applications – can lead to awkward conversations with a client. Adverse and unwelcome decisions can often be avoided if the fact finding and research process is thorough at the outset. In other words, by not applying for cover that was always going to be declined.

Protection isn’t complicated, but sometimes it can be. There are a lot of moving parts to stay on top of. Insurance providers regularly update their policies, particularly critical illness and income protection cover.

They also regularly update their underwriting policies – just because a particular insurer previously accepted someone with an above average BMI on standard terms, it doesn’t mean they are going to offer the same terms again.

Unless you advise and arrange protection on a very regular basis, it is easy for knowledge to slip. In our experience, many clients in the ‘wealth management space’ tend to be in their 50’s and 60’s where it’s unusual to find a client with a clean bill of health. We also find that due to their age and the sum assured required, medicals and GP reports are frequently requested. Helping a client navigate safely and efficiently through this process can also take a considerable amount of time and effort.

Broadly, we find that clients are all too ready to insure their lives and maybe even protect themselves against critical illness, but income protection often lags behind as it isn’t deemed to be a priority.

In a year when Swiss Re reported a 10% reduction in income protection policies sold, we all know that the risk of becoming too ill to work is greater than the risk of suffering a critical illness or even dying.

Yet so much is reliant upon income, such as our:

  • Lifestyle
  • Mortgage
  • Bills
  • Mental wellbeing.
  • Pension contributions.
  • Education
  • Bank of Mum and Dad.
  • Payment for health/household insurances.

Often the person who stays at home to raise the family can be completely overlooked. If that person had an accident or was too ill to be able to run the house, raise the children, cook the meals, taxi drive the children, then who would do it? And how would that be financed?

Why liquidate hard-earned savings and assets, or be forced to downsize, when they can all be protected by arranging a suitable policy whilst paying an affordable monthly premium?

What matters is your duty of care to your client and that protection is considered at the forefront of financial planning.  

Marcia Banner, Financial Planning Week tip: IHT planning ahead of the Budget

The latest inheritance tax (IHT) Statistics, published by HMRC in July, show that despite the relatively recent introduction of the residence nil rate band, IHT receipts received by HMRC during the tax year 2020/21 were £5.4 billion – an increase of 4% (£190 million) on the tax year 2019/20. With the nil rate band and residence nil rate band frozen at current levels until at least 5 April 2026, and house prices and asset values continuing to rise, it is likely that this represents the beginning of an upward trend in the annual IHT take.

While no significant IHT reforms are expected in the impending Budget, it is always worth making use of currently available IHT strategies prior to Budget Day where possible, so as to pre-empt any measures that are introduced unexpectedly and with immediate effect. With this in mind, in this article we will consider a simple six-step strategy that clients with estates in excess of the nil rate band should follow in order to mitigate the effects of IHT on their estates and maximise the amount that passes to their heirs upon their death:

  1. Tax-efficient Wills – The first step in any estate planning strategy should be to ensure that clients have tax-efficient Wills in place and that these are reviewed regularly to take account of legislative as well as circumstantial changes. For example, a Will drafted prior to 2016 is unlikely to include provisions that take account of the effect on the residence nil rate band of leaving the home otherwise than to children or grandchildren outright. Recommending that clients review and update their Wills not only helps you develop relationships with fellow professionals; it also can save the clients significant amounts of IHT thereby enhancing your own professional credibility. Many clients with joint estates that are above or approaching £2m do not, for example, recognise the potential benefit of leaving an amount up to the nil rate band to a trust on first death – yet this will reduce the amount passing to the surviving spouse or civil partner and help to keep the joint estate on second death down to below the £2m figure above which valuable residence nil rate band starts to be lost. Married clients and clients in a civil partnership with business assets that are likely to be sold after death, as well as those who have previously been widowed, can also make significant IHT-savings by leaving business assets and/or nil rate sums to a trust on first death – and, of course, Will trusts present opportunities for trustee investment business and further IHT planning following the client’s death.
  2. Deeds of variation – where a client receives an inheritance that creates or aggravates an existing IHT problem, deeds of variation offer a solution that is superior to any other form of planning. Usually where a substantial gift is made, the gift will constitute a potentially exempt transfer (PET), if made outright, or a chargeable lifetime transfer, if made to a trust, that must be survived by seven years for an IHT benefit to be obtained. In addition, it is not possible (unless a sophisticated packaged scheme is used – please see 5. below) for the donor or settlor to retain any benefit in the gifted sum or asset without this being a ‘gift with reservation’. If, however, property or funds that derive from an inheritance are gifted within two years of the death, the gift is treated for IHT purposes as if it had been made by the deceased. This means that not only is the donor’s estate reduced immediately by the full amount of the gift (i.e. no requirement for the donor to survive seven years); if the gift is made to a trust, the donor/settlor can be included as a possible beneficiary – and so retain full access to the inheritance – without any gift with reservation issues. The planning opportunity will be lost once the two-year period has expired though – so it is vital to act quickly to identify appropriate clients and implement the planning without delay. This will be especially important with Budget Day looming given the ever-present speculation that deeds of variation may be ‘abolished’ at some point.
  3. Maximise use of IHT exemptions – there are a number of exemptions from IHT that enable gifts, that leave the estate immediately, to be made without them impacting on other planning. The most well-known of these are the annual exemption of £3,000; and the normal expenditure out of income exemption which allows an individual to regularly give away surplus earned or investment income without restriction provided that certain conditions are satisfied. This second exemption is particularly valuable as there is no cap on how much can be given and the amounts gifted can vary from year to year as long as some sort of pattern can be demonstrated. This could, for example, be something as simple as the client resolving to give away “a third of my rental income each year” or “the annual dividend income paid on my shares in XYZCo Ltd”. Alternatively, the pattern could be linked to regularly occurring events such as grandchildren’s birthdays or payment of school fees or life insurance premiums. It is, however, important that the donor does not have to resort to capital (such as withdrawals from an investment bond) to maintain their standard of living having given away income, otherwise the exemption will be denied and the gifts will be treated as PETs or chargeable transfers as appropriate. An impending Budget is an ideal time to review clients’ financial affairs to ensure that all available exemptions have been used to avoid losing out if modifications to exemptions are made from Budget Day.
  4. Make outright gifts or gifts to trusts – gifts that do not fall within one of the exemptions from IHT will be either potentially exempt or chargeable depending on whether they are made directly to another individual or via a trust. Either way, for a gift to be treated as made ‘outright’ it will be necessary for the client to be able to comfortably afford to make the gift in the knowledge that he or she will not be able to access the gifted funds if circumstances change. Where a gift is made directly to another individual (or via an absolute trust) it will be a PET. PETs leave the estate after seven years and will never give rise to an immediate liability to IHT when made, whatever the value. They can, however, impact on the nil rate band available to the estate as well as the nil rate band available to any later created trust if not survived by seven years.

Clients who are happy to give up access to some of their wealth but are not comfortable about giving their intended beneficiaries unfettered access to large funds, may prefer to make gifts via a discretionary trust. Again, the gifted amount will be fully outside the estate after seven years. However, unlike with a PET, there could be an immediate liability to IHT at the lifetime (20%) rate if the amount gifted exceeds the settlor’s available nil rate band. In addition, discretionary trusts will be subject to the ‘relevant property regime’ of IHT ten-yearly (periodic) and exit charges. Although such charges are unlikely to apply to smaller trust funds, it is vital to seek tax guidance before setting up discretionary trusts to ensure that full account is taken of other planning (such as earlier chargeable transfers or even PETs) that could impact on the likelihood and size of charges going forward. With proper advice, measures can be taken that will help to mitigate or even avoid these charges while ensuring that the client’s overriding objectives for control are met. Of course, mitigation techniques (such as multiple trust planning) are always at risk of HMRC attack and this is therefore another area where it may be prudent to try to establish arrangements prior to Budget Day.

  1. Consider packaged schemes for IHT and income tax-efficient access – where clients are unable or reluctant to make outright gifts to trust or otherwise due to a (potential) need for access to their investments, there are a number of life-insurance based schemes that are based on established IHT principles which are acceptable to HMRC . The most popular examples of these are the Loan Trust and the Discounted Gift Trust.

Generally speaking, the Loan Trust is most suitable for clients who are looking for flexible ad-hoc access to their original capital in return for moderate IHT rewards: the investment amount will initially be frozen at its original value for IHT purposes but will reduce to the extent that loan repayments are taken and spent during lifetime; while the Discounted Gift Trust provides the settlor with regular cash payments at a fixed, pre-determined level with no ad-hoc access to the rest of the investment in return for an immediate reduction in the estate for IHT, with the entire investment IHT-free after seven years.

Again, while there is no suggestion that either of these schemes will be targeted by Budget Day measures, it won’t hurt clients who are considering implementing packaged IHT-schemes to do so before Budget Day as a precautionary measure.

  1. Consider whole of life insurance to fund any residual liability – once you have worked your way through the above five steps in the strategy and either implemented or discounted taking action at each stage, clients facing an IHT liability upon their death may wish to consider funding for any residual liability with life insurance. Depending on the client’s age and state of health, a life insurance plan written in trust can provide a cost-effective solution to an IHT-problem where there is no opportunity to reduce the estate – perhaps because it is largely tied up in property or other assets standing at a significant capital gain. Premium payments will be treated as gifts to the trust but if these can be funded out of surplus income, these will usually fall within the normal expenditure out of income exemption for IHT meaning that they will leave the estate immediately and not impact on any other planning.


In summary, this simple six-step strategy will serve as a useful IHT mitigation tool regardless of whether or not a Budget is impending. However, like all forms of tax planning, IHT mitigation techniques that work in the present are vulnerable to legislative change and a looming Budget is therefore a good opportunity to spur clients into action and implement any planning that is being considered before it’s too late.

Chris Jones, Financial Planning Week tip: Making the most of pensions tax relief ahead of another Budget

As we approach another Budget there will no doubt be the usual speculation that pensions tax relief may come under attack. And with the latest HMRC statistics showing the estimated gross tax cost of pensions tax relief at £41.3bn in 2019/20, this may be too tempting for the Treasury to ignore.

Whilst wholesale changes to pension tax relief are unlikely in the short term, there may be some tinkering with allowances and reliefs. Any further changes are unlikely to make to make pension contributions more favourable. Therefore, where clients have the available funds and allowances, it may be better to make contributions sooner rather than later.

It’s worth a reminder of the limits and mechanics of the tax relief available on pension contributions to ensure clients can maximise the benefits of making any contributions.

Annual allowance

The annual allowance limits the tax benefits on the total contributions paid in a tax year. This will include contributions made by the individual, their employer, or a third party on behalf of the individual. The standard annual allowance is £40,000. High earners may have a lower tapered annual allowance, which can be as low as £4,000 and will depend on their level of earnings. Those who have accessed their pension benefits flexibly may be subject to the £4,000 money purchase annual allowance.

Where an individual exceeds their annual allowance in any tax year they are be able to carry forward any unused allowances from any of the three previous tax years.  

If, after allowing for any carry forward, the contributions exceed the individual’s annual allowance in any tax year, the individual will be subject to an annual allowance charge. The annual allowance charge aims to reclaim the tax relief received on the contribution. The excess over the annual allowance is added to the individual’s other taxable income and charged at their marginal rates of income tax. 

For example, if a higher rate taxpayer exceeds the annual allowance by £10,000 the annual allowance charge would be £4,000 assuming they remained within the higher rate band after adding the £10,000 to their other income.

Tax relief on personal contributions

Tax relievable personal contributions are limited to 100% of the individual’s relevant earnings in the tax year they are paid, which is broadly earnings from their employment or self-employment. Other types of income such as dividends or buy-to-let rental income do not count as relevant earnings. 

It is not possible to carry forward unused earnings from a previous year. If, for example, an individual has unused allowances of £90,000 and earnings of £30,000 the maximum tax relievable personal contribution is limited to £30,000.

Where an individual’s earnings are less than £3,600 they can pay and receive tax relief on contributions of up to £3,600 in any tax year. It is not possible to carry forward this allowance.

Tax relief is available on personal contributions at the individual’s highest marginal rates of tax. How the relief is applied depends on what type of scheme the contributions are paid into, either a “relief at source” scheme or “net pay scheme”. Aside from non-taxpayers (please see below), the tax relief available is the same whichever method is used.

Relief at source

Personal pensions and group personal pensions will operate as relief at source schemes. With these, the contributions are paid net of basic rate tax and the provider adds the tax relief. The provider then reclaims this directly from HMRC. Basic rate relief is added regardless of the tax rate the individual pays, even if they are non-taxpayer. Any higher rate or additional rate tax is reclaimed direct from HMRC by the individual. The relief is claimed by increasing the individual’s basic rate tax band by the gross value of the individual’s contribution.


Paul earns £70,000 a year and wants to make a gross contribution of £10,000 to a relief at source scheme. He pays a contribution of £8,000 to the pension provider who add the 20% tax relief.

Paul’s basic rate tax band is then extended by £10,000. This means that £10,000 more of his income is taxable at 20% rather than 40% and so he benefits from a further £2,000 of tax relief.

Net pay schemes

Most occupational schemes operate on a “net pay” basis. With this type of scheme, the individual’s pension contributions are deducted from their pay before it is subject to tax. This means the full amount of tax relief is applied immediately by reducing the taxable pay. Note though that National Insurance contributions are still applied to the full pay before the deduction of the pension contribution.


Fiona earns £80,000 a year. She pays personal contributions of £5,000 to her occupational pension scheme. The £5,000 is paid gross to the pension provider and her taxable income reduces to £75,000. The net cost to her of the £5,000 pension contribution is £3,000 so she has received 40% tax relief.

Note that because contributions simply reduce the level of taxable earnings, any non-taxpayer in a net pay scheme will not receive tax relief. This is an anomaly in the tax system and one the Government has been consulting on to resolve.

Salary sacrifice

With salary sacrifice, the employee reduces their salary in exchange for a pension contribution. Therefore, technically, the pension contribution is an employer contribution. For tax purposes it works in a similar way to a net pay scheme. However, the advantage of salary sacrifice is that it reduces the salary for all purposes, meaning that both the employer and employee also save the National Insurance on the amount sacrificed.

Tax relief on employer contributions

Employer contributions are always paid gross. As long as they are within the individual’s annual allowance there is no tax consequences on the employee. The employer can claim relief against corporation tax on the contributions as long as they meet what are known as the “wholly and exclusively” rules. Essentially this means that in order to benefit from tax relief, any contributions must be a genuine expense in the running of the business. In a normal employer/employee relationship this is unlikely to be an issue as there would usually be a genuine commercial reason for paying employer pension contributions as part of the employee’s reward structure.  

For small owner managed limited companies it can also be an extremely tax efficient way of extracting funds from the company. Again, meeting the “wholly and exclusively” condition in this type of situation is rarely a problem where the owner/director is taking on the business risks (e.g. as a shareholding director) of the company. However, issues can arise where contributions do not represent the fair market reward for a role – if, for example, a large contribution is made for the spouse of a director who has minimal duties (and that spouse is not is taking on the business risks of the company) and a pension contribution of that size would not normally be made for other employees who have similarly minimal duties.

Unlike personal contributions, employer contributions are not limited to the level of the individual’s earnings. So, for example, a director earning £10,000 could also receive an employer pension contribution of £40,000. The company will receive corporation tax relief on the contribution as long as it meets the “wholly and exclusively” rules.

Lifetime allowance

In addition to the limits on pension contributions, the lifetime allowance (LTA) sets a limit on the overall benefits that an individual can receive from all of their pension plans without suffering an additional tax charge. The LTA is currently £1,073,100 and is frozen at this level until 2025/26. Where an individual takes benefits in excess of this, or dies or reaches age 75 without taking their benefits, an LTA charge applies on the excess. The LTA charge is 55% if benefits are taken as a lump sum or 25% if the funds are used to provide an income. Any income is also subject to income tax at the point it is taken.

Where uncrystallised funds or funds in drawdown are subject to an LTA test at age 75 the tax charge on any excess is always at 25%.

With the LTA currently frozen, more and more clients are likely to be impacted by the limit and charges. This limit also needs to be considered for clients considering making further contributions.

Earlier in the year there were rumours that this limit may be reduced further, and this is one to watch out for in the Budget. The only positive news is that whenever the LTA has been reduced in the past, protection has been available to allow clients to protect the LTA at the current levels.