Estate planning questions feature in most R06 sittings, and they carry significant marks. The case studies often involve clients in their 50s or 60s with accumulated wealth, property, pension funds, and a desire to pass assets to the next generation efficiently. If you can handle these questions well, you'll pick up marks that many candidates leave on the table.
The challenge is that estate planning sits at the intersection of several technical areas, inheritance tax, trusts, pensions, wills, and gifting strategies, and the examiner expects you to draw on all of them in a single, coherent answer.
The IHT framework you need to know
The nil-rate band (NRB)
The standard IHT nil-rate band is £325,000 per individual. This is the amount that can be passed on death free from inheritance tax. It has been frozen at this level since 2009 and is currently set to remain frozen until at least April 2028.
Any unused NRB can be transferred to a surviving spouse or civil partner, meaning a married couple can potentially pass on up to £650,000 free from IHT.
The residence nil-rate band (RNRB)
An additional allowance of £175,000 is available when a qualifying residential property is passed to direct descendants (children, grandchildren, step-children). This too can be transferred between spouses, giving a combined RNRB of up to £350,000 for a couple.
However, the RNRB starts to taper for estates valued above £2 million. It reduces by £1 for every £2 above this threshold. This means that for estates above £2.35 million (for a single person) or £2.7 million (for a couple), the RNRB may be completely lost.
Exam tip: If the case study involves clients with an estate near or above £2 million, the examiner expects you to discuss the RNRB taper. Many candidates mention the RNRB without checking whether the client actually qualifies for it. This is a common error noted in examiner reports.
IHT rate
The standard IHT rate is 40% on the value of the estate above the available nil-rate bands. A reduced rate of 36% applies if the deceased leaves at least 10% of their net estate to charity.
Gifting strategies: PETs and CLTs
Potentially exempt transfers (PETs)
A PET is a gift made by an individual to another individual (or to a bare trust). It's immediately exempt from IHT provided the donor survives for seven years. If the donor dies within seven years, the PET becomes chargeable and uses up part of the nil-rate band.
Taper relief applies if the donor dies between three and seven years after making the gift:
- 0-3 years: 0% reduction (full 40% rate)
- 3-4 years: 20% reduction
- 4-5 years: 40% reduction
- 5-6 years: 60% reduction
- 6-7 years: 80% reduction
Exam tip: Taper relief reduces the tax on the gift, not the value of the gift. This is a distinction that catches candidates out regularly.
Chargeable lifetime transfers (CLTs)
A CLT occurs when an individual makes a transfer into a relevant property trust (such as a discretionary trust). If the cumulative value of CLTs in the previous seven years exceeds the nil-rate band, there's an immediate IHT charge at the lifetime rate of 20%.
If the donor dies within seven years, the CLT is reassessed at the death rate of 40%, with credit given for any lifetime tax already paid.
Exam tip: CLTs are less commonly tested than PETs in R06, but when they do appear, candidates often struggle with the interaction between the lifetime charge and the death charge. Make sure you can explain both.
Annual exemptions and other reliefs
Don't forget the smaller exemptions, they're easy marks:
- Annual exemption: £3,000 per donor per tax year (can carry forward one year's unused allowance)
- Small gifts exemption: £250 per recipient per year (cannot be combined with the annual exemption for the same recipient)
- Normal expenditure out of income: Regular gifts made from surplus income are exempt, provided they don't reduce the donor's standard of living
- Wedding/civil partnership gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else
- Spouse/civil partner exemption: Transfers between UK-domiciled spouses are fully exempt
Trust questions in R06
Trusts appear in R06 more often than candidates expect. You don't need to be a trust specialist, but you do need to understand the main types and when each is appropriate.
Bare trusts
The beneficiary has an absolute right to the trust capital and income. Bare trusts are treated as PETs for IHT purposes when assets are placed into them. They're commonly used for children and grandchildren, with the assets passing to the beneficiary at age 18 (in England and Wales).
When to recommend in R06: For clients who want to make a gift to a child or grandchild but the recipient is too young to manage the assets.
Discretionary trusts
Trustees have discretion over who receives income and capital from the trust, and when. Assets placed into a discretionary trust are treated as CLTs for IHT purposes. The trust is subject to periodic charges (every 10 years) and exit charges.
When to recommend in R06: For clients who want flexibility over how their wealth is distributed, for example, where there are blended families, vulnerable beneficiaries, or concerns about a beneficiary's financial maturity.
Loan trusts and discounted gift trusts
These are more specialised planning tools that occasionally appear in R06:
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Loan trust: The client lends money to a trust and retains the right to repayment. The loan is still part of the estate, but any growth on the invested capital is outside the estate.
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Discounted gift trust: The client gifts capital to a trust but retains the right to regular payments (the "discount"). The gift element is a PET or CLT, but the retained rights reduce the transfer value, meaning less of the nil-rate band is used.
Exam tip: You don't need to know the technical detail of these trusts in great depth for R06. But if the case study involves a client who wants to reduce their estate while retaining some income or access, mentioning these as options shows the examiner you understand the breadth of planning tools available.
Will planning: the marks candidates forget
It's remarkable how often candidates overlook will planning in R06. If the case study mentions that a client doesn't have a will, or that their will is out of date, there are marks available for addressing this.
Key points to cover:
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Dying intestate means the estate is distributed according to the rules of intestacy, which may not reflect the client's wishes. If the client is unmarried or has children from a previous relationship, intestacy can lead to outcomes they wouldn't have chosen.
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Appointing guardians for minor children is only possible through a will. If the case study mentions young children, this is an easy mark.
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Lasting Powers of Attorney (LPAs), while not part of a will, they're closely related to estate planning. An LPA for financial affairs allows a chosen person to manage the client's finances if they lose mental capacity. An LPA for health and welfare covers medical decisions. Both should be mentioned if the client doesn't have them in place.
Pensions and IHT: the planning point most candidates miss
Pension funds are generally outside the estate for IHT purposes. This makes pensions one of the most tax-efficient ways to pass wealth to the next generation.
If the client has other income sources in retirement (such as ISA income, rental income, or state pension), drawing from those first and preserving the pension fund can be an effective IHT strategy. The pension fund continues to grow tax-free, remains outside the estate, and can be passed to beneficiaries on death.
If the client dies before age 75, the pension fund can be passed to beneficiaries completely tax-free. If they die after 75, beneficiaries pay income tax at their marginal rate on withdrawals, but IHT still doesn't apply.
Exam tip: This is one of the highest-value planning points in R06 estate planning questions, and it's consistently under-used by candidates. If the case study involves a client with both pension and non-pension assets, always consider the IHT implications of the drawdown order.
Estate planning questions in R06 reward candidates who can pull together multiple strands of knowledge into a coherent, client-focused answer. Know the IHT framework, understand the main trust types, don't forget wills and LPAs, and always consider how pensions fit into the picture. If you can do all of that while referencing the specific facts of the case study, you'll score strongly on these questions.