Which AI tool is best for Inheritance Tax (IHT) advice?

I would first establish the client’s desire to reduce IHT and whether they have sufficient assets and income to maintain their lifestyle throughout retirement, including potential care costs. I would also explore why they want to move to cash as the bot is right it does nothing for inheritance tax reasons. Things I think it has missed that I would do:

• Review their will and estate structure
• I would recommend reviewing their will with a solicitor to ensure assets are owned tax-efficiently and pass in accordance with their wishes. This includes reviewing property ownership, trust provisions, the nil-rate band and residence nil-rate band, which can make a significant difference to IHT exposure.
• Consider trusts (it does mention this but these trusts are not that complex)
• A Discounted Gift Trust (DGT) may suit a client who wants to reduce IHT while retaining a regular income. They gift capital into a trust but retain a right to withdrawals. An actuarial discount may reduce the initial transfer value for IHT, with the gifted capital potentially falling outside their estate after seven years. However, access to the gifted capital is lost.
• A Loan Trust allows the client to lend capital to a trust. The outstanding loan remains within their estate, but future investment growth may fall outside it. This may appeal to a nervous investor who wants to retain access to their original capital.
• Life assurance and gifting- I would just expand with the below.
• Whole-of-life insurance written in trust could provide funds to meet an IHT liability without selling assets. Pension withdrawals could potentially fund premiums, although the income tax implications need careful consideration.

I don’t think it is appropriate to mention business relief assets- this client does not have the risk appetite for these investments.

Zoë Dagless

Grade: B/C

Gifts from surplus income – detail around this is lacking. For example, some people think regular withdrawals from an ISA count as income but they do not unless it is natural income generated through income bearing investments. There is also a lack of mentioning what this could entail – for example this could be a regular gift direct to someone, it could be paying for nursery fees for someone, or paying into a Junior ISA for a grandchild. There are specific rules to be met around gifting from income and it is important to get these right – speak to an adviser.

Trusts – lack of detail around how and why trusts are used. There are so many different types of trust – everything could be considered here from a bare or discretionary trust, through to loan trusts and discounted gift trusts. Trusts are a complex area of planning and professional advice should be sought to ensure these are correctly established, registered, and ensure set up to mitigate tax not create new tax liabilities.

Nice to see the AI has recommended they contact an adviser! Bonus points would have been given if it had recommended independent advice.

Gifting – wedding gift exemption of £5,000 not mentioned, nor gifts to charity during lifetime.

Spending the money hasn’t been mentioned and this is my favourite type of mitigation. If someone has saved all their life they deserve to enjoy those savings before they die. Spending wealth is the No.1 approach to mitigating IHT – go on those big holidays, make the memories with the people you love, don’t leave it all until you’re gone, enjoy the funds with those people. This doesn’t necessarily mean you can’t also gift and set up trusts etc but increasing spending should always be explored where appropriate. Cashflow modelling can be vital here to demonstrate sustainability of spend, or to help someone work towards ‘dying with zero’ alongside their other estate planning.

Calculating IHT liability first off should be done before anything else – for many it’s less than they think, for some it’s more. Many don’t realise they have a full £1m to use if they are married and leaving home to their children. Sometimes for people with smaller IHT liabilities there is no planning needed as they will likely spend the funds down during their lifetime.

Reviewing their will with a solicitor could be a crucial part of their IHT planning – for example the placing of half the house (if tenants in common) into trust on first death, or the use of other types of will trust. This isn’t mentioned by the AI at all.

Why are they moving to cash? Is there a planning reason behind this or simply nerves. There needs to be a wider exploration of what the motive is behind this, what they are trying to achieve and why. The likelihood is that moving to cash is neither necessary nor suitable except in specific circumstances.

The use of BR investments into trust and the advantage of the extra £2.5m allowance not mentioned, these can be excellent options to explore with professional guidance and ensuring you aren’t overexposed to BR.

Esther Clemmey

Grade: C

There is some good information within this response – it makes it clear that pensions will become subject to IHT in 2027. Moreover, it did correctly highlight the changes to AIM and ‘full business relief’ and most importantly drew clear attention to Business Relief being considered high risk, registering the cautious nature of the question being ’quite nervous’

I liked how it was vague about Trusts as they are complex and there can often be a lot of nuance. Not going into detail is a good decision. The response also included some important details about charitable giving and made a clear point that holding cash tends to lose value in real terms due to the impact of inflation.

It also makes it clear that they are not a financial adviser and almost quite complimentary – although, the quality of the advice should be the determining factor as to whether it is value for money.

Unfortunately, there are several issues throughout the content, ranging from unclear and vague wording to information that is factually incorrect. For people with cash or other liquid assets, gifting can be one of the more actionable ways to reduce their IHT exposure. As this is something a reader could potentially act on after reading the response, inaccuracies in this area are potentially harmful.

There are a couple of elements that need clearing up here. Firstly, HMRC explicitly states that the £250 small gift exemption cannot be combined with the £3,000 annual exemption for the same recipient. The way the response is worded could imply that these exemptions can be used together, which is incorrect. Claude also fails to mention that if you did not use your full annual exemption in the previous tax year, the unused amount can be carried forward, although only for one year.

Perhaps the clearest issue with this section, however, is its discussion of tapering the tax due on gifts. This is a common misconception. Essentially, tapering is only applicable if your gifts are over the £325,000 nil rate band.

The section relating to Life insurance should also be clearer. There can be a marked difference between Whole of Life insurance and Term Life assurance, both in terms of cost and the cover provided. With a term policy, if you die after the term has ended, there is no payout. Having looked at various online comparison tools, few appear to offer Whole of Life cover. This creates a risk that someone acting on the information and arranging cover themselves could select the wrong type of policy, or an unsuitable term or level of cover for their needs.

I also find the section on regular gifts out of surplus income somewhat problematic. This is an exemption that can work very well if used correctly, but unfortunately the information provided is too vague to enable someone to understand how to use it properly. It needs to be explicit that not all forms of income are treated in the same way. Some sources of income will not count, such a withdrawal from a bond.
If someone receives £3,500 of monthly income and has expenditure of £3,000, they might reasonably assume they can gift the £500 difference as surplus income. However, if £300 of that monthly amount is a bond withdrawal treated as capital rather than income, only £200 will count as surplus income.

So, all in all, I would have to give this a D. There is some helpful information in here, but a lay person would find it difficult to assess this.

Harry Beddoe

Grade: D

Very similar to Claude however feels more appropriate this answer.

Zoë Dagless

Grade: B/C

Same as the above really but in addition it doesn’t mention anything around investing. Loan trusts could be perfect for this couple if they are thinking they don’t want further growth on their money (hence moving to cash) but don’t have immediate plans to spend it all. This would allow the funds to remain invested, with the growth sitting entirely out of their estate.

Esther Clemmey

Grade: C

Within this answer, the LLM has been a bit more comprehensive than the previous one. I like how it discusses the IHT allowances available and that spouses can potentially inherit unused allowance. In addition to this, there is some discussion about considerations before investing/gifting. An example of this is ‘Only give away money you can afford to lose access to’ when talking about gifting. This can often be a lot more complex than many would first anticipate, which is why we arrange a cash flow model when assessing this for clients.

I like how Chat GPT does state that certain criteria need to be met for regular gifts out of surplus income to be exempt from IHT, it demonstrates the complexity of it better than the previous example.

It talks about gifts to charities well and again drew attention to Business Relief being considered high risk.

Once again, it reconfirms that should you look to undertake IHT Planning, consult an IFA.

Whilst there is some good content in here, the problem is that it omits some keyways of mitigating IHT. There is no mention of trusts and Whole of Life Insurance policies. Whilst not always suitable, there should be some reference to these key pillars. It also fails to mention the small gift exemption. It should highlight that the RNRB has criteria to be met and it makes no mention of taper on gifts and when this would apply, it sticks to only mentioning the 7 year rule.

It correctly explains that moving into cash will not reduce an IHT liability and offers a strategy for holding cash. However, unlike the previous answer, it does not explain that inflation can erode its value over time.

All in all, there is nothing misleading or factually incorrect, but it tries to cover too much without covering enough of the right stuff.

Harry Beddoe

Grade: C+

‘Shifting to cash is a valid way’ is misleading – shifting to cash is quite rarely the right answer, plenty of studies over the years have shown that timing the market is effectively impossible. Therefore shifting to cash leaves the question of when do you re-invest? People talked about shifting to cash 2 years ago and would have missed 2 of the strongest stock market years we’ve seen for many years. If they had encashed when would they have reinvested the funds without entering the top of the market?

Full encashment is rarely suitable. If someone thinks they have enough money for a lifetime then they should consider DGT, loan trusts, gifting, or donor advised funds.

Interesting that again, no one mentions spending the money, or cashflow modelling to see how to optimise spending over time rather than holding the wealth until death.

Esther Clemmey

Grade: C

Of the three, this was my favourite. Firstly, it deftly addressed the issue regarding cash and quite clearly lays out the IHT allowances.

I like how it has used the information about their attitude to risk, and tailored the answers to this. The others were simply throwing options at the wall and hoping something sticks.

Most importantly, for any discussion about IHT, the LLM has asked a question. Now this isn’t necessarily the best question, but it is a question. To mitigate IHT, we have to make a series of compromises; these can vary from loss of control of the assets, to having to spend more on a monthly basis. It’s really only by questioning that we can truly understand what level of compromises you’re willing to make.

However, the question posed by Gemini does imply that there is perhaps more to gifting out of surplus income than simply indicated in the answer.

I feel like this should have made clearer about how the annual gifting allowance and the small gift exemptions interact and the taper rules on larger gifts. I also am surprised that it didn’t make clear that unused pension funds and pension death benefits will form part of the estate for IHT purposes from April 2027, or recommend seeking financial advice.

Trusts are a valuable tool and these are not included other than to hold a Whole of Life policy.

It is short on detail on the life policy section, not referencing both Whole of Life and Term Assurance. Individuals taking action to set up a policy and place it in trust may not select the appropriate policy for their circumstance. The detail on the payment of premiums falls short on warning of issues of funding the policy and the interaction with gifting exemptions. It is also misleading to say that the payment goes directly to beneficiaries, when the policy is wrapped in a trust. It is true that the proceeds can reach the beneficiaries without the need for probate.

Harry Beddoe

Grade: C

The bots jumped into IHT tactics without first checking whether the reader can afford to give money away. I would start by making sure they have enough to maintain their lifestyle throughout retirement, including potential care costs, and by asking why they want to move to cash, since that does nothing for IHT. All three missed a review of the reader’s will with a solicitor, which can make a big difference to how much tax is due.

Zoë Dagless

Overall the bots outputted very similar information, largely likely to have been lifted from blogs and guides put together by human financial planners and solicitors over time. Therefore, the feedback for each applies to all. I gave them all a C because whilst the information they output is largely correct, it is an extreme simplification of what is a complex area of financial planning.

Everyone’s situation is unique and different, and what drives people to make financial decisions is often emotion more than logic. The financial planner’s role is to balance those two influences, ensuring that an individual is not making emotional decisions that could influence their financial planning negatively in years to come.

Esther Clemmey

Whilst AI can tell you about the tools used to mitigate IHT, an IFA would make sure we’re using the right tool. There isn’t enough information here to make a recommendation, as effective IHT planning depends heavily on individual circumstances. What are you looking to achieve? And why are you looking at IHT planning now? Understanding your financial situation with these factors will allow a good adviser to draw your attention to other relevant considerations.

Harry Beddoe