Inheritance Tax: 5 key things you need to know

Inheritance Tax (IHT) can be a huge bill for your loved ones when you die. But knowing what it is and how it works means you can reduce it, or even avoid it altogether.


  • With careful planning, much of the tax paid on estates after death can be avoided.
  • It’s crucial to take full advantage of the exemptions, allowances, gifting and other investments detailed in this article.
  • Your Wellesley adviser is best placed to help you understand the ins and outs of Inheritance Tax.

The ins and outs of IHT

Inheritance Tax (IHT) ranks among the most reliable sources of income for the government. According to official statistics, during the tax year 2020-2021, IHT receipts received by HMRC amounted to £5.4 billion, and have remained around that level for the past four years.1

However, much of the tax paid on the value of your estate after death can be avoided. If you have meticulous planning in place, it’s entirely possible to mitigate and minimise much of the IHT you would otherwise pay, as this way you ensure full use of exemptions, gifting and other tax-efficient investments.

If you fail to action those plans, the amount that you’re able to pass on to your nearest and dearest can be significantly reduced. Assets such as your family home, bank accounts, ISAs, jewellery, art and antiques are liable to IHT at the standard rate of 40% after the first £325,000.

There’s no need to worry, though, as we’ve included the five key things you need to know about IHT – simply read on.

1. Seeking advice can be life-changing

IHT is a highly convoluted area. Indeed, you won’t know every rule, exemption and allowance and how to use them – and nobody expects you to.

Taking financial advice can go some way to reduce your IHT as part of your general later-life planning, which also includes retirement income, planning for social care, giving money away when you’re alive and passing it on after your death.

You can begin planning at any age, but it will often get underway when your savings and assets start to accumulate. This might tally with children becoming more financially independent and mortgage payments reducing or even disappearing.

Having a plan in place means you’re less likely to make reactionary decisions, while also reducing the chances of an unwelcome tax surprise.

2. Variation in IHT thresholds and rates

Gaining a better understanding of how thresholds work can instantly minimise a large part of your projected IHT bill.

  • There’s no IHT to be paid – even above £325,000 – if you leave everything exceeding that amount to your spouse, civil partner, a charity or a community amateur sports club.
  • Your tax-free threshold rises to £500,000 if you give away your home to your children, step-children or grandchildren – subject to your estate being less than £2m.
  • A lower IHT rate of 36% is payable on certain assets if you give away at least 10% of the net value of your estate to charity.

3. Mitigate your IHT, by gifting

Gifting allows you to support your family as well as reducing your IHT liability. You can give away a maximum of £3,000 each tax year (your ‘annual exemption’), in addition to making any number of small gifts up to £250 per person, without incurring IHT.

Practically all gifts become exempt from IHT if you continue living for seven years. These are the main factors to take into consideration:

  • Gifts to your spouse or civil partner are tax-exempt during your lifetime, or upon death.
  • A tax-free allowance of up to £3,000 is applicable to gifts made to other beneficiaries. You may carry the allowance over for one tax year, which means you could give away up to £6,000 within a tax year.
  • Gifts to children or grandchildren as payment for a wedding or civil partnership are IHT-exempt, and are considered separate to the £3,000 annual exemption. You can give up to £5,000 to a child or £2,500 to a grandchild. This is an ideal way to pass on some of the value of your estate in the form of a gift that you potentially would have made anyway.
  • As long as you can prove they don’t compromise your own standard of living, gifts made from your regular income are tax-free.
  • Gifts exceeding the allowance are exempt from IHT in the instance where you survive for seven years after making the gift. Gifts above the nil rate band, made between three and seven years before your death, are taxed on a sliding scale – this is otherwise known as ‘taper relief’. The longer the duration, the less you pay.

4. IHT planning to include pensions

The majority of any Defined Contribution schemes will fall outside of your estate, so if you wish to have a tax-efficient way of passing on your wealth, pensions could be part of the solution.

It may be that you have different pension pots and that you choose to pass one or more to your children or grandchildren.

Should you die before the age of 75, your pension pot can be paid as a lump sum – or income to any beneficiary – tax-free. From 75 onwards, beneficiaries must pay tax at their marginal rate on withdrawals.

5. Trusts for control of your money and IHT mitigation

Trusts are traditionally part of IHT planning, and continue to be an effective way to ensure the right people get the right money – at the right time.

There are a number of different types of trusts and ways of setting them up. In some cases you can access the funds, yet in others you can’t.

Trusts can be complicated, so always approach your Wellesley adviser before beginning the process of setting one up.


The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.


1 Inheritance Tax statistics: commentary, HMRC National Statistics, updated 29 July 2021

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