Inheritance Tax (IHT), is arguably one of the UK’s most unpopular taxes because it can leave a grieving family with a large bill. But even so, many people are still not taking practical steps to reduce the amount of IHT payable on their estate during their lifetime. What’s more, according to the Office for Budget Responsibility, the number of estates facing an IHT bill is expected to double from pre-pandemic levels by 2026. 

IHT can cause chaos for families during what is already a difficult period in their lives, which is why it’s worth taking a little time to consider what you want to leave, to who, and then plan the most efficient way to do so.

IHT rules can be complicated, so it makes sense to discuss your estate with a financial planner

Spend it

Your children may not approve, but one of the simplest ways to avoid leaving a large IHT bill on your estate is to spend the money while you’re still alive. But be warned, if you buy things like an expensive car or holiday home, they will be treated as taxable assets in your estate. 

Give it away

You could always ‘gift’ some of your money to your children, which gives you the added benefit of seeing your money put to good use while you’re still around. HMRC lets individuals make gifts worth up to £3,000 each year, and the gifts you make could take the form of money, jewellery, property or shares. You can also carry your £3,000 annual exemption over to the following year if you don’t use it – but only for one year.

However, larger gifts could trigger an IHT bill. The amount HMRC will charge depends on when the gift was made and when the benefactor passes away. For example, gifts given in the three years before the person’s death will be taxed at 40%, whereas if you live for seven years or longer after the gift is given, there’s no IHT due. Gifts made in years four, five and six are taxed on a sliding scale, known as ‘taper relief’.

With the right advice, practically everyone facing an IHT liability can reduce or eliminate it

Insure it

You could take out an insurance policy to cover your IHT bill on your death. These types of policies are usually either ‘whole of life’ or a specific ‘term’ policy. However, this type of insurance can be expensive and may become unaffordable towards the end of your life.

Put your estate into trust

A trust is a legal arrangement that places property or other assets outside of your estate. This means that, when you die, the value of those assets would normally be excluded from the inheritance tax calculation. Some trusts are more complicated than others and it’s important to get professional advice in order to get the right trust for your circumstances. The main advantage with a trust is that you can have a say on who in your family benefits from the trust as well as what your family chooses to spend the money on. However, if you die within seven years of the trust being set up, it might not be fully effective for IHT purposes. You also need to take account of the tax treatment of the assets being placed in trust, as some will be subject to income and capital gains tax at higher rates – another reason why it pays to seek advice. 

There are several ways in which a financial planner can help you to leave a legacy for your loved ones.

Invest it in companies that qualify for Business Property Relief

Some smaller companies and family-owned businesses are eligible for an IHT allowance known as Business Property Relief (BPR). It’s possible to invest in companies that qualify for BPR and, provided the shares have been owned for two years or longer and are held at the time of death, the value of your investment is free from IHT. However, it’s important to note that these investments are relatively high risk because they invest in smaller companies, so tend to be suitable for more experienced or wealthier investors. If appropriate, a financial planner can help to set up a specialist portfolio of BPR qualifying companies managed professionally on your behalf.

Given the chance, most people would prefer to leave their legacy to their children and grandchildren, instead of HMRC. To find out more about inheritance tax planning: book an appointment with one of our specialists.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.