What is inheritance tax?

When you die, your estate is valued, and this value is subject to inheritance tax (IHT). Generally, any excess over the nil-rate band (currently £325,000) is chargeable to inheritance tax at 40%.

How can you reduce your inheritance tax bill?

Like many other taxes, inheritance tax (or IHT) allowances have been frozen. However, due to the large increases in house prices, many people are actually paying more inheritance tax. Data from HMRC has revealed that Inheritance tax collected between April 2022 and February 2023 totalled £6.4bn, which is £900m higher than the same period last year.

There are a number of possible ways to reduce your inheritance tax bill, but always speak to a professional advisor in advance of taking any action as everyone’s personal circumstances differ.

1. Give it away

The easiest way to pass your wealth onto your loved ones without paying tax is simply to give it to them.

• 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.

If you die within seven years of making a larger gift, IHT will be payable. 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%.

There is another way to give. Donate at least 10% of your estate to charity and get a 4% discount on your IHT rate for the rest of your estate, lowering it from 40% to 36%.

2. Put it in a pension

Your pension, depending on the type of pension plan you hold, if it is kept invested could be used to pass on wealth as it is usually excluded from your estate for IHT purposes. Nominate beneficiaries for your pension should you pass away before you receive it, and 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 (carefully)

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.

There could be other solutions such as with Alternative Investment Market (AIM) holdings.

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. However, be aware that the position has become more complicated in recent years, and trusts might not always be suitable. However, in some circumstances, they may still have their uses. The trustee can control the assets, rather than them being passed immediately onto the beneficiaries. This might help if your beneficiaries are not known for financial prudence or are young children. 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.

Seek expert help

Expert advice from tax specialists can be vital to help work out the total value of an estate, calculate how much inheritance tax is likely to 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.

If you would like to discuss inheritance tax, please do get in touch with our tax experts at RA Accountants. We would be delighted to hear from you and arrange a complimentary online video call to discuss in detail your personal circumstances and possible actions.

Find out more

Gov.uk website: How Inheritance Tax works: thresholds, rules and allowances

Disclaimer;
The information provided on this web site is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from a professional accountant before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties. The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.