Family first: how to reduce your Inheritance Tax bill

We all like to think that our hard-earned assets will pass on to our loved ones when we die; however, the reality is that Inheritance Tax can significantly reduce the amount they receive. HMRC is pocketing more from Inheritance Tax (IHT) than ever before. Official figures show that IHT receipts have increased by 10% year-on-year since the 2009/10 tax year, totalling a staggering £5.2 billion in the 2017-18.

Furthermore, the number of estates paying IHT has almost doubled since 2011. However, with some careful planning, you can legally reduce your IHT liability – or possibly pay nothing at all. Here are five effective strategies to reduce the impact of Inheritance Tax.

1. Make the most of your lifetime gifts exemption

Perhaps the most obvious way to reduce, or even eliminate, your Inheritance Tax liability is to use your gifting exemption. When it comes to IHT, it is actually more tax-efficient to gift money while you are still alive, rather than to plan to pass it on when you die.

You can make gifts of up to £3,000 in total in any tax year without attracting IHT. If the gifting exemption is not used in one tax year, it can be carried forward to the next, and, moreover, these exemptions are personal, so a couple could remove £12,000 from their joint estate in one tax year. Furthermore, parents can give £5,000 to each of their children as a wedding gift, and grandparents can give £2,500.

It is possible to make further tax-free gifts, but you have to survive for seven years from the date of the gift for it to completely leave your estate. If you die within seven years, and the cumulative value of the gifts exceeds the nil-rate band, IHT is payable on the excess at tapered rates shown in the table below:

Less than 3 years 3 to 4 years 4 to 5 years 5 to 6 years 6 to 7 years 7 or more years
40% 32% 24% 16% 8% 0%

2. Give away excess income

Another way to prevent the tax man getting his hands on your wealth before your loved ones is taking advantage of the ‘normal gifts out of income’ rule. If you make regular gifts out of income that don’t affect your standard of living, they are exempt from IHT. Keeping a record of who you made the gifts to, their value and the date they were made, should speed up the process of any checks made by HMRC. You could also consider establishing a standing order (e.g. to provide funds to pay for grandchildren’s school fees) as it supports the intent to make the gifts on a regular basis. If you can satisfy the conditions for the exemption, the gifts escape IHT as soon as they are made, and you do not have to survive for seven years.

3. Maximise your pension

In the majority of cases, pensions are outside the scope of IHT, making them one of the most tax-efficient ways to pass on your wealth. A pension can be paid as a lump sum or income to any beneficiary with absolutely no tax to pay if you die before the age of 75.

If you are 75 or over when you die – and that is likely to be the case for most individuals – your heirs do pay tax, but only when they take the money out. Even then, the tax is paid at their own Income Tax rate. Therefore, making extra contributions to a defined contribution pension should be on your list of potentially worthwhile estate planning options.

Please note that there are instances where IHT can and does apply to pensions. For example, if you make a pension contribution while you are in serious ill health and don’t survive to take your retirement benefits, there may be a tax charge to pay, as you may be deemed to have intentionally tried to avoid IHT. As always, it is sensible to seek professional financial advice to help you plan effectively to mitigate potential IHT.

4. Make sure your Will is up-to-date

It is important to regularly review your Will, as who you leave money to will affect whether inheritance tax is payable. Money or property left to a spouse or registered civil partner does not attract IHT, but if your estate passes to a child, then IHT will have to be paid on anything over the nil-rate band.

If your children end up inheriting part of your estate, and their share is worth more than the individual IHT nil-rate band, they could be liable to pay 40% tax on anything they inherit over that amount. However, you could make provisions to ensure that your nil-rate band legacy is left to your children, via a trust, for example, with the rest of your estate going to your spouse or civil partner. This could ensure assets are passed to children and other loved ones without attracting IHT.

5. Write a life insurance policy into a trust

Where the above points cannot completely eliminate your potential inheritance tax liability, it is worth considering taking out a life assurance policy to help your relatives pay off the IHT tax bill when you die. By writing a life assurance policy into a trust, the proceeds will go directly into a trust intended for a specific beneficiary, instead of the sum being paid out as part of your legal estate. This therefore means that its value will not count towards the inheritance tax threshold.

There are several benefits of taking this approach: not only does it provide cash to help pay off an inheritance tax bill, but the premium paid for the policy will also reduce the value of your estate, further reducing your estate’s future IHT bill. Recent research by Direct Line revealed that just 20% of people with a life insurance policy have placed it into trust, and almost as many didn’t even know it was an option.

The right strategy for you

As we have seen, there are a number of allowances and relief we can use in order to mitigate the amount of Inheritance Tax we pay. However, the reality is we don’t make the most of these. Here at Wellesley, we can help you put together a bespoke plan for reducing your IHT liability. With careful planning, you can reduce HMRC’s cut of your wealth, meaning your hard-earned assets are passed on to your loved ones.

For more information

If you have a question about Inheritance Tax mitigation or would like more information about our services, please contact Wellesley Wealth Advisory on 01444 848508 or via email at

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