Tax-efficient estate planning 2020-21

estate planning 2020 21

An estate plan that minimises your tax liability is essential. If your estate is large it could be subject to inheritance tax (IHT), which is currently payable where a person’s taxable estate is in excess of £325,000.

Keeping inheritance tax to a minimum

Planning and a well-drafted Will can help to ensure that your assets will be distributed in accordance with your wishes. Careful planning can help you ensure that more of your wealth passes to the people you love, through planned lifetime gifts and a tax-efficient Will.

Estimate the tax on your estate


Value of: Your home (and contents)


Your business (see note 1)


Bank/savings account(s)


Stocks and shares


Insurance policies


Other assets


Total assets


Deduct: Mortgage, loans and other debts


Net value of assets


Add: Gifts in last seven years (see note 2)


Less: Legacies to charities


Deduct: Nil-rate band

– 325,000

Deduct: Residence nil-rate band


Taxable estate £


Tax at 40%/36% is £ (see note 3)


1. If you are not sure what your business is worth, we can help you value it. Most business assets currently qualify for IHT reliefs
2. Exclude exempt gifts (e.g. spouse, civil partner, annual exemption)
3. IHT rate may be 36% if sufficient legacies left to charities (see later). The tax on gifts between three and seven years before death may benefit from a taper relief.


Making a Will

If you own such possessions as a home, car, investments, business interests, retirement savings or collectables, then you require a Will. A Will allows you to specify who will distribute your property after your death, and the people who will benefit. Many individuals either do not appreciate its importance, or do not see it as a priority. However, if you have no Will, your property could be distributed according to the intestacy laws. 

You should start by considering some key questions:

  • Who?
    Who do you want to benefit from your wealth? What do you need to provide for your spouse? Should your children share equally in your estate – does one or more have special needs? Do you wish to include grandchildren? Would you like to give to charity?
  • What?
    Should your business pass to all of your children, or only to those who have become involved in the business, and should you compensate the others with assets of comparable value? Consider the implications of multiple ownership.
  • When?
    Consider the age and maturity of your beneficiaries. Should assets be placed into a trust restricting access to income and/or capital? Or should gifts wait until your death?

Making use of lifetime exemptions

You should ensure that you make the best use of the available lifetime IHT exemptions, which include:

  • The £3,000 annual exemption
  • Normal expenditure gifts out of after-tax income
  • Gifts in consideration of marriage (up to specified limits)
  • Gifts you make of up to £250 per person per annum
  • Gifts to charities
  • Gifts between spouses, facilitating equalisation of estates (special rules apply if one spouse is non-UK domiciled).

Spouses and civil partners

On the first death, it is often the case that the bulk of the deceased spouse’s (or civil partner’s) assets pass to the survivor. The percentage of the £325,000 nil-rate band not used on the first death is added to the nil-rate band for the second death.

Case Study

Rob and Sarah were married. Rob died in May 2008, leaving £50,000 to his more distant family but the bulk of his estate to Sarah. If Sarah dies in 2020/21 her estate will qualify for a nil-rate band of:

Nil-rate band on Rob’s death


Used on Rob’s death


Unused band


Unused percentage


Nil-rate band at the time of Sarah’s death




Nil-rate band for Sarah’s estate



If you die within seven years of making substantial lifetime gifts, they will be added back into your estate and may result in a significant IHT liability. You can take out a life assurance policy to cover this tax risk if you wish. However, you can make substantial gifts out of your taxable estate into trust now, and as a trustee retain control over the assets (this may well be subject to CGT or IHT charges).

The IHT main residence nil-rate band 

The ‘residence nil-rate band’ (RNRB) applies where a residence is passed on death to direct descendants such as a child or a grandchild. This is set at £175,000 for 2020/21 (rising in line with CPI inflation from 2021/22). The additional band can only be used in respect of one residential property which has, at some point, been a residence of the deceased.

Any unused nil-rate band may be transferred to a surviving spouse or civil partner. It will also be available where a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed to direct descendants on death.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value (after deducting any liabilities but before reliefs and exemptions) of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

Gifting strategies

Business assets

Under current rules, there will be no CGT and perhaps little or no IHT to pay if you retain business property until your death. This is fine, as long as you wish to continue to hold your business interests until death, and recognise that the rules may change.

Alternatively, you may wish to hand your business over to the next generation. A gift of business property today will probably qualify for up to 100% IHT relief, and any capital gain can more than likely be held over to the new owner, so there will be no current CGT liability. If business or agricultural property is included in the estate, it may be appropriate to leave it to someone other than your spouse; otherwise the benefit of the special reliefs may be lost.

Appreciating assets

Gifts do not have to be in cash. You could save more IHT and/or CGT by gifting assets with the potential for growth in value. Gift while the asset has a lower value, and the appreciation then accrues outside your estate.

 Gifting income

Another way to build up capital outside your own estate is to make regular gifts out of income, perhaps by way of premiums on an insurance policy written in trust for your heirs. Regular payments of this type will be exempt from IHT, but please note that your executors may need to be able to prove the payments were (a) regular and (b) out of surplus income, so you will need to keep some records to support the claim.

Charitable gifts

Gifts to charity can take many forms and result in significant tax reliefs for both lifetime giving and on death. Perhaps you are already making regular donations to one or more charities, coupled with one-off donations in response to natural disasters or televised appeals. Here we look at some of the ways you can increase the value of your gift to your chosen charities through the various forms of tax relief available.

Gift Aid

Donations made under Gift Aid are made net of tax. What that means is that for every £1 you donate, the charity can recover 25p from HMRC. Furthermore, if you are paying tax at the 40% higher (or 45% additional) rate, you can claim tax relief equal to 25p (31p). Consequently, at a net cost to you of only 75p (69p additional rate), the charity receives £1.25.

Scottish taxpayers now pay different income tax rates than taxpayers in the rest of the UK. Donations by Scottish taxpayers paying at the starter rate of 19% will be treated in the same way as 20% taxpayers in the rest of the UK. Donors may need to check that they have paid enough tax to cover the Gift Aid claim, however. Scottish taxpayers using Gift Aid who pay tax at 21%, 41% or 46% claim the difference between this and the basic rate.

A payment made in the current tax year can, subject to certain deadlines, be treated for tax purposes as if it had been made in 2019/20. This may not appear important to many people, but if you paid additional rate tax in 2019/20 and do not expect to do so this year, a claim will allow you to obtain relief at last year’s rate. (Note: the carry-back election must be made before we file your 2020 Tax Return – another example of the importance of keeping us informed!) You must pay enough tax in the relevant year to cover the tax the charity will recover (that is, 25p for every £1 you gift).

Payroll giving

You can make regular donations to charity through your payroll, if your employer agrees to operate the scheme. It operates by deducting an amount from your gross pay equal to the net cost to you of the monthly net donation you want to make.

Gifts of assets

Not all donations need to be monetary. You can make a gift of assets, and if the assets fall within the approved categories the gift can obtain a triple tax relief. Any gain which would accrue on the gift is exempt from CGT and the asset is removed from your estate for IHT. In addition the value of the asset is deductible against your income for the purposes of calculating your income tax liability.

Charitable legacies on death

A reduced rate of IHT applies where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil-rate band) is left to charity. In those cases the 40% rate will be reduced to 36%.

Estate planning for single people

Single people might not have given much thought to estate planning, but you should make a Will to set out your preferred funeral arrangements, how you want your estate to devolve on your death, and who will have responsibility for it.

Your estate might pass to your parents or your siblings, but would you perhaps prefer to leave your wealth to your nieces and nephews – with the bonus of potential IHT savings through ‘generation skipping’? A Will is also vital for anyone who, although legally ‘single’, has a partner who they wish to benefit from the estate on their death.

Second marriages

Parents face a different set of challenges in second (or subsequent) marriages. If both partners are wealthy, you might want to direct more of your own wealth to children of your first marriage. If your partner is not wealthy, you might wish to protect him or her by either a direct bequest or a life interest trust (allowing your assets to devolve on their death according to your wishes). Should younger children receive a bigger share than grown up children, already making their own way in the world, and should your partner’s children from the previous marriage benefit equally with your own?

If you are concerned about your former spouse gaining control of your wealth, consider creating a trust to ensure maximum flexibility in the hands of people you choose. You also need to plan to ensure that your partner is properly provided for. Look at your Will, pension provisions, life insurance and joint tenancies.

Providing for the grandchildren

Your children may be grown up and financially secure. If your assets pass to them, you will be adding to their estate, and to the IHT which will be charged on their deaths. Instead, it might be worth considering leaving something to your grandchildren.

Updating your estate plan

Estate plans can quickly become out of date. Revisions could be due if any of the following events have occurred since you last updated your estate plan:

  • The birth of a child or grandchild
  • The death of your spouse, another beneficiary, your executor or your children’s guardian
  • Marriages or divorces in the family
  • A substantial increase or decrease in the value of your estate
  • The formation, purchase or sale of a business
  • Retirement
  • Changes in tax law.

Reviewing your Will 

A Will can be a powerful planning tool, which enables you to:

  • Protect your family by making provisions to meet their future financial needs
  • Minimise taxes that might reduce the size of your estate
  • Name an experienced executor who is capable of ensuring that your wishes are carried out
  • Name a trusted guardian for your children
  • Provide for any special needs of specific family members
  • Include gifts to charity
  • Establish trusts to manage the deferral of the inheritance of any beneficiaries
  • Secure the peace of mind of knowing that your family and other heirs will receive according to your express wishes.

Having taken the time to make a Will and prepare an estate plan, you must review them regularly to reflect changes in family and financial circumstances, as well as changes in tax law. Wills can also be rewritten by others within the two years after your death, in the event that some changes are agreed by all concerned to be appropriate.

When was the last time you reviewed your estate plan?

Please do not hesitate to get in touch with the team of personal tex specialists at DRG Chartered Accountants. We would be delighted to discuss your personal circumstances, your long term goals and possible inheritance tax strategies to help you develop or update your estate plan.

Further information

This webpage is part of our Tax and financial strategies 2020/21 website pages, which are intended to help you to make the most of your business and your personal finances by highlighting the main tax allowances and incentives and suggesting strategies that you might wish to incorporate into your own financial planning. 

Do take a look at our other Tax and financial strategies 2020/21 website pages to find out more:
Tax and financial strategies 2020/21
Personal tax essentials - Tax and financial strategies 2020/21
Business tax strategies - Tax and financial strategies 2020/21
Tax and employment - Tax and financial strategies 2020/21
Personal and family financial strategies - Tax and financial strategies 2020/21
Retirement planning strategies - Tax and financial strategies 2020/21
Savings and Investment strategies - Tax and financial strategies 2020/21
Business exit strategies - tax and financial strategies 2020/21

Developing a effective tax and financial strategy can be complex. Do get in touch with the tax team at DRG Chartered Accountants to discuss your personal circumstances, your long term objectives and possible steps that you could take.

DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.   












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