Checkmate: Beat Inheritance Tax in five simple moves

Inheritance Tax is an opponent feared by many a diligent saver. We all want our hard-earned savings and assets to pass to our nearest and dearest when we die; however, the uncomfortable reality is that the taxman usually ends up taking a cut.

More estates are paying Inheritance Tax (IHT) than ever before, with IHT receipts totalling a staggering £5.2 billion in the 2017-18 tax year. Despite this, relatively few people understand the rules of IHT and the ways in which they can prevent their families paying over the odds.

If you want your loved ones to keep more of your estate when you die, there are some simple steps you can take to mitigate your IHT liability.

1. Give to family members

One of the easiest (and not to mention potentially the most rewarding) ways to prevent the taxman pocketing your wealth is to give some of it away during your lifetime. By using your gifting exemption, you can give away up to £3,000 each tax year, IHT exempt. You can also make use of any unused gifting allowance from the previous tax year. So, a couple could potentially remove £12,000 from their joint estate. Furthermore, parents can give £5,000 to each of their children as a wedding gift, and grandparents can give £2,500.

The gifted money could be invested on behalf of a child or grandchild. For instance, you could contribute towards a child’s Junior ISA, which could give them a head start and get them into the savings habit. The Junior ISA allowance has gone up to £4,368 for this tax year, presenting a great opportunity to help give children/grandchildren a financial head start.

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.

2. Make gifts ‘out of income’

If you have sufficient surplus income, you may want to make use of the ‘normal expenditure out of income’ rule: if you make regular gifts out of income and in doing so don’t affect your standard of living, they are exempt from IHT. This exemption is only limited by the amount of spare income available to give away, so is well worth taking advantage of.

If you can satisfy the conditions for the exemption, the gifts escape IHT as soon as they are made. It is therefore worth keeping a record of who you made the gifts to, their value and the date they were made, as this will accelerate the process of any checks made by HMRC. You could also consider establishing a standing order (e.g. funds for grandchildren’s school fees) as it demonstrates the intent to make the gifts on a regular basis.

3. Place your assets into trust

The use of trusts can potentially reduce an IHT bill and is well worth your consideration. Putting some of your cash, property or investments into a trust will be outside of your estate – and therefore outside the scope of IHT, provided you survive for seven years. You can set up a trust right now or write one into your Will. For the latter, there are complicated anti-avoidance rules that must be navigated, so you should take advice from an expert.

You could also consider writing a life insurance policy into a trust to help your relatives pay off the IHT tax bill when you die. By doing this, 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.

4. Save more into your own pension

Pensions are one of the most tax-efficient ways to pass on your wealth. Saving into your own pension will avoid IHT at 40% which could be incurred were the same funds held elsewhere in your estate. This is because anything left in your 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, your heirs do pay Income Tax, but only when they take the money out. Even then, the tax is paid at their own marginal rate.

So, maximising this year’s annual pension saving allowance should be on your list of potentially worthwhile estate planning options. There have been no major changes to pension allowances this tax year; most people can still get tax relief on pension contributions worth up to £40,000 per tax year (or 100% of earnings, if less). Those with adjusted earnings of more than £150,000 will continue be subject to tighter restrictions.

Please note that 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 deliberately tried to avoid IHT. To reduce the possibility of a disagreement with HMRC, it is sensible to seek professional financial advice.

5. Review your Will

Our final IHT-reducing strategy is 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. This means couples often leave everything to each other. 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.

Choosing your strategy

To conclude, then, with some careful planning, you can legally reduce your Inheritance Tax bill – or possibly pay nothing at all. Here at Wellesley, we can help you put together a bespoke plan for mitigating your IHT liability, meaning your hard-earned assets are passed on to your loved ones.

If you have a question about Inheritance Tax mitigation or would like more information about our services, please contact Wellesley Wealth Advisory on 01444 244551 or via email at

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Author: Richard Rochford
Author: Richard RochfordSenior Adviser