Tag Archives: TYE

Tax year end planning checklist for individuals – 2021/22 tax year

A handy checklist of suggested planning considerations for individuals for the end of the tax year.


As well as considering tax planning for the current tax year, it’s important to put in place strategies to minimise tax throughout the next tax year. The majority of planning strategies have greatest effect if implemented before a tax year begins.

This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2021/22 tax year and to plan ahead for 2022/23. 

However, while tax planning is an important part of financial planning, it is not the only part. It is essential that any tax planning strategy that is being considered also makes commercial sense.

Suggested planning points for consideration

Income tax 

  • Reduce taxable income below £150,000 to avoid 45% tax. Pension contributions are one of the few ways to reduce taxable income.
  • For married couples / civil partners, ensure each has sufficient income to use their personal allowance: £12,570 in 2021/22. This will remain at that level until 5 April 2026. 
  • The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000. If income is above £100,000, then individual pension contributions before 6 April 2022 can reduce income to £100,000 to restore all or part of a 2021/22 personal allowance which would otherwise be lost.
  • Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment.
  • Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual’s income without top slicing when assessing entitlement to the personal allowance.
  • Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond.

    Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.

Capital gains tax

The term “capital gains tax planning”, in this context, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:

  • timing of the transaction, e.g. bringing the transaction forward or delaying it;
  • ensuring that full advantage is taken of all available exemptions and reliefs;
  • depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse / civil partner or the use of a trust;
  • using the annual exempt amount; and
  • making full use of any available losses.

Capital gains tax planning:

  • Maximise use of this year’s annual exemption (currently £12,300). Any amount unused cannot be carried forward – “use it or lose it”.
  • To defer the payment of tax for a year, make a disposal after 5 April 2022.
  • To use two annual exemptions in quick succession, make one disposal before 6 April 2022, and another after 5 April 2022. 
  • Try to ensure each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this.

Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss). 

It should also be borne in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time, if the completion date was between 6 April 2020 and 26 October 2021; 60 days for disposals completed on or after 27 October – please see HMRC’s guidance. 

In July 2020, the Chancellor asked the Office of Tax Simplification (OTS), to carry out a review of capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11 November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. However, no such announcements were made in the March 2021 Budget. Instead, the Government announced that the annual capital gains tax exemption would be frozen at £12,300 until 5 April 2026. And, on 30 November 2021, the Treasury issued the Government’s formal final response to the OTS reports, as part of the publication of its ‘Tax administration and maintenance’ package. It did not accept any of the tax changes suggested by the OTS in its first report, saying: “…these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC”. It added that “The Government will continue to keep the tax system under constant review to ensure it is simple and efficient”. The Treasury has, however, accepted five of the 14 OTS recommendations in the second OTS report, which deal with practical and administrative issues.

So, after nearly four years of uncertainty, the work of the OTS on capital gains tax can now mostly be forgotten, at least until after the next election.

Inheritance tax

  • Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2022.
  • The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax, provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption.
  • For those who have income that is surplus to their needs, it may also be appropriate to establish arrangements whereby regular gifts can be made out of income in order to utilise the normal expenditure out of income exemption. An ideal way of achieving this is to pay premiums into a whole of life policy in trust to provide for any inheritance tax liability.

The OTS recently produced two reports on the simplification of inheritance tax. While the first OTS report looked at administration, the OTS’s second report was focused on the structure of inheritance tax, including suggestions to revamp annual exemptions and review the interaction of the capital gains tax uplift and inheritance tax business relief on death.

No such changes were announced in the March 2021 Budget. Instead, the Treasury accepted the OTS proposal to relax reporting regulations for non-taxpaying estates. And the Government issued a further response as part of the ‘Tax administration and maintenance’ package published on 30 November, in which it said: “…the  Government has  decided not  to  proceed  with  any  changes  at the  moment,  but  will bear  your very valuable  work  in mind  if  the  Government  considers  reform of  IHT  in the  future”. So, the work of the OTS on inheritance tax can now also mostly be forgotten.

However, the Government did announce that the inheritance tax nil rate band and residence nil rate band would be frozen at £325,000 and £175,000 until 5 April 2026, and the residence nil rate band taper will continue to start at £2 million. Therefore, as wealth continues to rise, planning to mitigate inheritance tax should be started as early as possible.

And clients that can afford to make substantial gifts out of income may like to get that planning up and running sooner rather than later in case any rule change occurs in future – in the hope that if a rule change does occur, existing arrangements will be protected.

Savings and investments 

Savings income and dividends 

  • For married couples / civil partners ensure each has sufficient savings income to use their £500 or £1,000 personal savings allowances, and sufficient dividends to use their £2,000 dividend allowances.
  • Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in tax year 2021/22.
  • The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so in 2021/22 people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £17,570. However, if a person does qualify, ensure they have the right type of investment income (e.g. interest) to pay 0% tax.
  • Where interest is due just after 5 April 2022, closing an account just before the tax year end can bring that interest forward to the 2021/22 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year.

ISAs and JISAs 

  • Annual subscriptions (£20,000 and £9,000 respectively) should be maximised before 6 April 2022 as any unused subscription amount cannot be carried forward. The annual ISA and JISA subscription limits remain at £20,000 and £9,000 for 2022/23.


  • For subscriptions to be relieved in tax year 2021/22 they must be made before 6 April 2022:
    • EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. Maximum income tax relief is 30%. Unlimited capital gains tax deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2020/21 it must be paid before 6 April 2022.
    • VCTs – Up to £200,000 can be invested. Maximum income tax relief is 30%. No ability to defer capital gains tax, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free.

It is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.

 Investment bonds 

  • Investment bonds can deliver valuable tax deferment. To minimise taxation on encashment, consider deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or the investor is a basic rate taxpayer. In the meantime, if cash is required, the investor can use the 5% tax-deferred annual withdrawal facility.

    (Alternatively consider assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment.)
  • Or, it may be worth triggering a chargeable event gain before the end of this tax year, by full encashment/surrender, so that the liability to tax falls in 2021/22, if the taxpayer anticipates that their top tax rate in 2022/23 will be greater than this year’s.

    (Note that the timing of the chargeable event depends on the way in which the chargeable event gain is triggered. Chargeable event gains in respect of partial withdrawals are triggered at the end of the policy year, whereas chargeable event gains on full policy encashments/surrenders are triggered on the actual date of the event.)


  • The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. This means that 5 April 2022 is the last opportunity to use any unused allowance of up to £40,000 from 2018/19.
  • In 2020/21, the Chancellor added £90,000 to the two income thresholds that govern the tapering of the annual allowance. So, in 2021/22, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000 respectively. These levels should mean that fewer pension members will be impacted by the tapered annual allowance from 2020/21 onwards, than in earlier years. This means more pension savings and the possibility of avoiding a tax charge.

    For high earners, however, it’s still important to check if they are likely to be subject to the tapered annual allowance and whether there is anything, they can do about it. If the client has sufficient carry forward and their threshold income is only just above £200,000 for 2021/22, making additional individual pension contributions could reinstate their whole 2021/22 annual allowance.

    Note that the minimum the taper can take the annual allowance down to is £4,000 from 2020/21 onwards, a reduction from the previous £10,000. This will not have an impact on earlier tax years, and it will not affect the amounts of unused annual allowance available for carry forward from tax years prior to 2020/21.

  • The personal allowance reduces by £1 for every £2 for those with adjusted net income in excess of £100,000. This means that, for 2021/22, there will be no personal allowance available once adjusted net income exceeds £125,140. Making extra pension contributions not only increases pension provision, but for those who may be subject to a reduced personal allowance a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice.
  • In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Benefit is totally lost when income reaches £60,000.
  • The changes to the death benefit rules on pensions from 6 April 2015 should have prompted a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not been done, now is the time. In theory a person’s pension plan could provide income for future generations, as beneficiaries will be able to pass the remaining fund to their children and so on down the line.
  • Individuals should consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax-free returns.
  • In the March 2021 Budget, the Government announced that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026. Individuals who have funds close to or exceeding the lifetime allowance may need to review any previous decisions in respect of continuing to fund their pensions and or deferring crystallising their benefits based on the expectation of inflationary increases.

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.

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.

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.