Managing Inheritance Tax


Inheritance tax (IHT), is a tax that’s levied on someone’s estate when they die. In recent years, the IHT allowances in the UK have been frozen, meaning that more people are likely to end up paying it. The rise in house prices has also contributed to the increase in IHT collected.

In this blog post, we’ll look at six ways to reduce your Inheritance Tax bill.

1 Give it away…

One of the easiest ways to pass on your wealth to loved ones without paying tax is by giving it to them before you pass away.

You can give up to £3,000 to loved ones each tax year without it becoming liable for IHT. If you didn’t use the allowance last year, you can combine it and pass on £6,000.

Gifts of £5,000 to children for a wedding are also protected from IHT; grandchildren can have up to £2,500.

Most people are aware that if you die within seven years of making a larger gift, IHT will be payable. In fact there’s a sliding scale.

  • Die three to four years after giving, the IHT rate lowers to 32%.
  • At six to seven years it falls to 8%.
  • Additionally, donating at least 10% of your estate to charity can result in a 4% discount on your IHT rate for the rest of your estate, lowering it from 40% to 36%.

2 Put it into a pension

Depending on the type of pension plan you hold, your pension, if it is kept invested, could be used to pass on wealth as it is usually excluded from your estate for IHT purposes.

If you nominate beneficiaries for your pension should you pass away before you receive it, IHT isn’t normally payable. If you die after the age of 75, your beneficiaries will need to pay income tax on the money they take out.

3 Invest it

But be careful!

Making the right kind of investments might help you avoid IHT.

An individual savings account (ISA) can’t help. ISAs are exempt from income tax and capital gains tax, but they form part of your estate for IHT. However, investing in Alternative Investment Market (AIM) holdings could be a solution. The companies listed on AIM tend to be smaller and more highly speculative in nature, in part due to AIM’s relaxed regulations and listing requirements.

However, investing in AIM companies tends to be high-risk investing and is not a route most people should consider.

You should seek independent financial advice before considering investing in this market, remembering that when investing, your capital is at risk and you could lose some or all of your investment.

4 Put it in Trust

Setting up a trust to hold your assets could keep them out of your estate, and out of the taxman’s reach. However, the position has become more complicated in recent years, and it might not always be suitable. The trustee can control the assets, rather than them being passed onto the beneficiaries right away.

This might help if your beneficiaries are not known for financial prudence or are young children.

Again, you should seek independent financial/legal advice before establishing a trust.

5 Insure it

You can take out a whole of life insurance policy large enough to mitigate some or all of your IHT liability.

You may need to regularly review the level of cover if your estate increases in value, as the original sum assured may not cover the whole IHT liability. Alternatively, you may choose a plan where the cover increases with inflation.

Whichever option is chosen, have it written in trust. Your beneficiaries won’t struggle with a huge inheritance tax bill when you die, but while you are alive, you will be paying monthly premiums.

6 Get some help!

Expert advice can be vital to help work out the total value of an estate, calculate how much inheritance tax is likely to be charged, and understand what options are available to manage that tax bill.

Advice on writing up a will to be tax-efficient is also essential.

A financial advisor can help you navigate the complexities of IHT and devise a plan that suits your specific circumstances. By taking advantage of the available options, you can reduce your IHT bill and leave a more substantial legacy for your loved ones.

How do you find a reliable Financial Advisor?

If you need an introduction to a financial advisor to help you with Inheritance Tax planning, we can pass on details of contacts we’ve worked with for many years, or you may prefer to search the Financial Services Register, operated by the Financial Conduct Authority, with whom all financial advisors who offer regulated service in the UK have to be registered.

If we can help at all, please get in touch.

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