Ireland 
USA The ABCs of IHT: inheritance tax explained
From APR to NRBs and PETs, inheritance tax (IHT) and estate planning is a maze of acronyms, jargon and complex legislation
With IHT thresholds frozen since 2009, more and more estates are becoming liable to this tax, which can be as high as 40%. Along with rumoured changes to the current IHT regime in the upcoming Budget, it’s more important than ever to think about your own estate planning arrangements. Gaining an understanding of IHT can be time well spent. Especially since it’s an area where the more forward planning that is done, the more tax-efficient your estate could be when it’s passed on.
We’re breaking down this jargon and explaining a wide range of inheritance tax acronyms and key terms. While we couldn’t quite think of an IHT-associated term for every letter of the alphabet (we challenge anyone to come up with a word beginning with the letter ‘x’ that relates to estate planning!), here are most of the phrases you need to be aware of.
Please note, the explanations in this article are based on current rules and regulations. They may also be dependent on your individual circumstances.
A
Absolute trust
A trust which has a beneficiary that cannot be changed. The beneficiary has an absolute right to the income and capital of the trust. Usually set up for minors. Also known as a bare trust.
Agricultural property relief (APR)
An IHT relief on land and buildings used for agricultural purposes.
Annual exemption
The amount that you can gift each tax year that is immediately free of IHT (currently £3,000 plus any unused amount from the previous year).
B
Bare trust
A trust which has a beneficiary that cannot be changed. The beneficiary has an absolute right to the income and capital of the trust. Usually set up for minors. Also known as an absolute trust.
Business relief
An IHT relief on the ownership of certain types of business, assets used by that business or shares in the business.
C
Chargeable lifetime transfer (CLT)
A transfer for inheritance tax purposes which isn’t exempt or potentially exempt, meaning it is immediately chargeable. Most commonly applies on transfers into a discretionary trust.
Codicil
A supplementary document to a Will, which usually makes a small change without the need for a new Will.
D
Discounted gift trust
A type of trust that enables the person who set up the trust to receive fixed withdrawals for life without being a gift with reservation.
Discretionary trust
Under a discretionary trust no beneficiary has a right to income or capital. The trustees decide who should benefit and when.
E
Enduring power of attorney (EPA)
A document appointing attorneys to make decisions about a person’s finances and property. They must be registered once the person who granted the power loses capacity. EPAs must be drawn up before the person loses capacity. These were the forerunners to lasting powers of attorney and haven’t been available since October 2007. Existing EPAs can still be used.
Equalising estates
Where appropriate, making sure that those who are married or in a civil partnership have similarly valued estates in order to help with IHT planning.
Estate planning
Organising your estate so your assets are easily and tax-efficiently passed to those that matter to you the most, during your lifetime and after you die. Estate planning is a key component of the service and advice provided by your financial planner.
Executor(s)
The person appointed in a Will to deal with the administration of the estate.
Exemptions
Transfers of value that are immediately free from inheritance tax, for example, the annual exemption of £3,000, or transfers between husbands, wives and civil partners.
Exit charge
A proportionate inheritance tax charge made when capital is paid out of certain types of trust.
F
Family investment companies (FICs)
A company structure used to pass wealth from one generation to the next.
G
Gift with reservation (GWR)
A gift from which the person making the gift can continue to benefit which is not effective for inheritance tax planning. Also known as reservation of benefit.
I
Inheritance tax (IHT)
The tax payable on the value of a person’s estate on death. The standard inheritance tax rate is currently 40%.
Inter spouse exemption
Transfers between husbands, wives and civil partners are free from IHT.
Interest in possession trust
A trust where the beneficiary has the right to any income as it arises, but not the right to the assets themselves. The term can also be used if the beneficiary has the right to receive other benefit from an asset, for example, the right to occupy a residence for a certain period of time but with no right of ownership of the property.
Intestacy
The situation where death occurs without a valid Will in place and the deceased’s estate is distributed in accordance with a set of rules.
J
Joint tenants
Property held jointly and equally between two people. If property is held as joint tenants on death it will automatically pass to the co-owner.
L
Lasting power of attorney (LPA)
Appoints attorneys to deal with a person’s health and finances. LPAs can be made for finances and property, as well as separately for health and welfare.
Loan trust
A trust established with a loan which is invested by the trustees. The person creating the trust, (the lender) can access the original loan while all growth on the loan falls outside of the lender’s estate.
Planning for the legacy you want to leave behind
For more details on what goes into effective inheritance tax planning, speak to your usual Evelyn Partners contact, book an appointment or call us on 020 7189 2400.
M
Marriage exemption
Gifts can be made in contemplation of a marriage or civil partnership and are exempt from IHT up to £5,000 per parent, £2,500 per grandparent or great grandparent and £1,000 from any other person.
Minors
Beneficiaries who are not yet deemed adults, i.e. those who are under 18 in England and Wales.
Moveable property
Under Scottish law there are two types of property - heritable and moveable. Movable property is everything that is not heritable property.
N
Nil rate band (NRB)
The threshold below which no IHT is payable, currently £325,000 in the 2024/25 tax year.
Normal expenditure out of income
An unlimited IHT exemption allowing regular gifts to be made from income as long as the person making the gift’s standard of living isn’t affected.
Q
Qualifying residential interest
A property that has been owned and occupied by the deceased which can be taken into account for the residence nil rate band.
R
Relevant property trusts
A type of trust that doesn’t qualify for any other form of tax treatment. For IHT purposes they are subject to entry and exit charges, as well as a charge on every 10-year anniversary of the trust being created.
Reservation of benefit
A gift from which the person making it can continue to benefit which is not effective for inheritance tax planning. Also known as a gift with reservation (GWR).
Residence nil rate band (RNRB)
An additional amount that can be passed on against the value of the family home, £175,000 for the current tax year.
S
Settlor
The person who funds a trust.
Seven year rule
Certain gifts are subject to inheritance tax unless you live for seven years after making them. See also taper relief.
T
Taper relief
Taper relief is the reduction of IHT applying on gifts made in excess of the nil rate band within seven years of death. The full rate of IHT is applicable if the gifter dies between zero and three years after the gift is made, with the amount of IHT reduced by 20% after year three, 40% after year four, 60% after year five, 80% after year six and 100% after year seven.
Tenants in common
Property where individuals each own a specific percentage of the asset. If property is held as tenants in common it will pass in accordance with the terms of the Will and not necessarily to the co-owner.
Testator
The person who makes a Will.
Transferable nil rate band
The ability to utilise a deceased spouse or civil partner’s unused nil rate band or residence nil rate band.
Trust
A method of passing assets to one set of people (the trustees) for the benefit of a separate set of people (the beneficiaries) usually via a written document.
Trust registration
The act of registering a trust with HMRC. Now required for most UK trusts.
Trustee
The legal owners of the assets held in a trust.
U
Unique reference number (URN)
The HMRC number given to trustees when registering a non-taxable trust.
Unique taxpayer reference (UTR)
The HMRC number given to trustees when registering a taxable trust.
V
(Deed of) Variation
A deed which enables a beneficiary under a Will to alter their entitlement in favour of someone else, within two years, without IHT consequences.
W
Will trust
A trust of any type established under a Will which only commences on death.
Z
Zakat
Zakat is an Islamic financial term for a specific form of charitable giving. Zakat and other qualifying charitable gifts either in life or through a Will are exempt from IHT. A gift of 10% or more of a net estate through a Will also reduces the rate of IHT from 40% to 36%.
Speak to Evelyn Partners about inheritance planning
As you can see, there’s a lot that goes into comprehensive estate and inheritance tax planning. Passing on your assets to the next generation efficiently requires finding the balance between tax planning for the future, while still being able to enjoy the now. If you’d like to discuss finding the right balance for your personal situation, speak to your usual Evelyn Partners contact, book a consultation online or call us on 020 7189 2400.
