Before diving in, it’s important to remember that HM Revenue & Customs (HMRC) tax rules are complex and can change at short notice – that’s why it’s important to consult a financial planner who will be able to advise you on your individual position. None of the information provided in this article should be considered as personal advice.

If your estate – which can include your home and other properties, as well as any savings, investments and life insurance policies – is valued at less than £325,000 (known as the ‘nil-rate band’), there’s no IHT to pay. That means your estate can be passed to your beneficiaries IHT-free.

However, if your estate is valued at more than £325,000, your beneficiaries will be expected to pay IHT at 40% on everything above that threshold. Also, any IHT bill due on your estate must be paid by your beneficiaries within six months of the death being recorded, otherwise interest charges will be added to it.

If you leave your entire estate to your spouse or civil partner, there’s usually no IHT for them to pay – plus it won’t use up your IHT allowances. So, when your surviving spouse or civil partner dies, their estate will benefit from a combined nil-rate band of £650,000 (£325,000 x 2) applied to the value of the estate.

According to 2022 research by Canada Life, 56% of UK adults have not written a Will. That equates to almost 30 million people. Of this number, almost four out of ten (36%) over-55s don’t have a Will. This is a troubling number, given that making a Will is one of the simplest and easiest ways to ensure there’s no doubt about how your assets will be passed on after your death.

Making a Will could also save your family thousands of pounds in unnecessary IHT. For example, your Will can be used to make gifts that use up your IHT allowance, or make gifts to charity which are free of IHT.

A Will is also essential if you are not married, or you would like some of your assets to be passed on to step-children or other family members. Without a Will, the law will determine how your assets are distributed, and they won’t do any IHT planning on your behalf.

Alongside the nil-rate band IHT allowance, the ‘main residence nil-rate band’ is an extra allowance that means more people can leave their family home to their children and grandchildren. As long as you pass your home to a direct descendant (children or grandchildren), HMRC lets you claim a further £175,000 in IHT-free allowances.

For example, this means that if a husband dies and leaves his estate to his wife, when the wife dies, provided she leaves the family home to their children, her estate benefits from combined IHT allowances of £1 million (£325,000 x 2, plus £175,000 x 2 = £1 million). However, if the total value of the estate is worth more than £2 million, the main residence allowance will fall by £1 for every £2 above that threshold.

Gifting assets during your lifetime is the simplest, and most effective, way of reducing an IHT liability. But it’s important to remember there are limits to how much of your wealth you choose to give away.

For example, you can gift a total of £3,000 to people each tax year without it being added to the value of your estate (your ‘annual exemption’). On top of that, you can make a tax-free gift to someone who is getting married or entering a civil partnership (the amount varies depending on their relationship to you), and make unlimited gifts to charity. You can also make smaller gifts of up to £250 to as many people as you like.

However, gifts of more than £3,000 are classed as ‘potentially exempt transfers’. This means the gift could be taxable if the giver doesn’t survive a full seven years after the gift is made. For more information on potentially exempt transfers.

See our ‘Setting up trusts and gifting in your lifetime’ article for more information.

Putting assets into a trust is one of the most common, and traditional, ways of reducing an IHT liability. Once the assets have been placed into trust, they no longer belong to you, and therefore will not be included when calculating the value of your estate for IHT purposes. However, assets placed into a trust must have been held in the trust for at least seven years before they are fully IHT-exempt.

For more information on the different types of trusts available, see our ‘Setting up trusts and gifting in your lifetime’ article.

You can arrange for a life insurance policy to cover the cost of a future IHT bill. For example, a ‘whole of life’ assurance policy can specify the amount you want paid out to your beneficiaries after you die. This lump sum can then be used to pay any IHT bill due.

Similarly, a ‘term’ insurance policy can pay out a lump sum during a specified period. This can be useful if you have already made gifts of large amounts, but fear you may not live seven years for those gifts to become fully exempt from IHT.

Although most life insurance policies are considered as part of your taxable estate when you die, provided you make sure the policy is ‘written into trust’, any policy payout will be deemed outside of the estate for IHT purposes. It’s also worth noting that taking out a life insurance policy can’t reduce the amount of IHT the estate is required to pay, but it can be a useful way of making sure the IHT bill can be paid by your family. This can avoid the need for them to sell assets to cover the bill after you’ve gone.

Some homeowners use equity release to free up money tied up in the value of their home. Most equity release schemes are ‘lifetime mortgages’ which don’t require any payments to be made. Instead, the interest is rolled-up and added to the loan, which is repaid when the property is sold (typically after you die or move into long-term care).
Less commonly, some equity release schemes require the homeowner either to sell a percentage, or all, of their property while still living there – or result in them taking out a mortgage and making interest repayments while they’re alive.

Equity release can help reduce an IHT bill, as it effectively reduces the value of the owner’s estate. The money could be used as an income during retirement, or even be used to make gifts, which would help to reduce a potential IHT bill even further.

However, any freed-up capital that’s not spent could still be liable for IHT. It’s also important to think carefully before securing debts against your home, especially if the loan you take out requires you to make regular interest payments.

For people with significant sums invested, investing in companies that qualify for Business Relief (BR) is an increasingly popular way for people to reduce their potential IHT bills.

You don’t have to own a business to invest in BR-qualifying companies. But as long as you have owned the shares for at least two years before you pass, the shares can be passed down to your beneficiaries free from IHT. They can then choose to sell those shares, or keep them.

BR-qualifying investments may therefore be an attractive option if you don’t want to wait seven years until gifts or assets placed into a trust become IHT-exempt. Also, as the shares are held in your name, you’ll keep control over more of your wealth, instead of putting it into trust or gifting it away. This could be important if you need to pay for care in the years to come, for example.

Do bear in mind, though, that BR schemes are relatively high-risk, and any assets held within them cannot be easily or quickly sold or exchanged for cash without a substantial loss in value. This makes them more suitable for experienced and adventurous investors who have access to plenty of other income or capital should they live longer than expected, or need to pay care costs.

Because IHT is a tax that’s only charged on your estate after you die, there are many legal possibilities open to you to reduce an IHT bill while you’re still alive.
With the right estate planning strategy in place, you could even manage to reduce the IHT liability on your estate down to zero, which could be a welcome relief for your loved ones. Choosing the right IHT and estate planning options will depend on your personal circumstances, but your Amber River independent financial planner will be able to talk them through and answer any questions you may have.