5 ways you can lessen the impact of Inheritance Tax

Plan ahead now to protect your estate and ensure you leave as much as possible to your loved ones.


  • Subject to other allowances being available, Inheritance Tax (IHT) is charged at 40% on the value of your estate over £325,000, but there are ways to reduce the tax bill your loved ones may face.
  • Options include making one-off or regular gifts, saving more into your pension and taking out a life-assurance policy written in trust to cover the expected bill.
  • We can help you position your estate so that all is in order and those you care about will be looked after in the future.

Nobody likes talking about death and we don’t much like talking about money either. So it’s hardly surprising that none of us relish the thought of estate planning. However, while we might not enjoy talking about death and money, we also don’t want to pay the taxman any more than we have to.

Inheritance Tax (IHT) is often described as a voluntary tax and, if you’re prepared to start thinking about what will happen to your money when you die, there’s often plenty you can do to reduce the tax bill your loved ones will eventually face. You might also get the opportunity to leave your family a ‘living inheritance’ and enjoy seeing them benefit from your wealth before you go.

What is Inheritance Tax and how is it charged?

Inheritance tax is currently charged at a rate of 40% on the value of your estate over £325,000. However, if you’re passing on property to direct lineal descendants, you can claim an extra allowance worth up to £175,000 (so long as your total estate is worth less than £2 million). This effectively means that qualifying single people with their own home can pass on £500,000 free of IHT, while married couples and civil partners can pass on up to £1 million as transfers between spouses after the first death are also tax free.

As the current tax year draws to a close, here’s how you can minimise the amount your loved ones pay.

1.Give money away now

One of the easiest (and most rewarding) ways to mitigate an IHT bill is to reduce the value of your estate by giving it away. In addition to the tax saving this may offer, you will get the satisfaction of seeing your loved ones benefit from your wealth before you die. You could buy a grandchild their first car, for example, or perhaps help them buy their first home.

Each year, you have a gifting allowance meaning you can give away up to £3,000 tax free, as well as make any number of small gifts up to £250 per person (provided you have not used another allowance on the same person). There are also additional allowances for wedding gifts. You can give away £5,000 when a child gets married, £2,500 to a grandchild or great-grandchild and £1,000 to anybody else.

If you have any left from the £3,000 gifting allowance from the previous tax year, you could combine them and give away as much as £12,000 before 5 April.

The value of any of these gifts will fall outside your estate immediately.

Any gifts that you make outside the specific allowances laid down by HMRC are considered to be ‘potentially exempt transfers’ and are subject to the so-called seven-year rule. This means that no IHT will be payable on the gift as long as you do not die within seven years of making it. If you die before seven years have passed, IHT will be payable; however, the rate at which it will be charged reduces over time from 40% to 0%. This is called taper relief.

2.Make gifts from income

If you’ve got spare income, you can also support loved ones with regular payments – helping children with school fees, for example, or a grandchild through university. You just need to be able to demonstrate that you can afford these payments after all your other regular expenses are paid and that they do not affect your standard of living.

It’s a good idea to keep a record of these gifts and make sure your loved ones know where it’s kept. This can help if the payments are investigated by HMRC.

3.Save more into a pension

The pension freedoms introduced in April 2015 mean pensions aren’t just a great way to save for retirement. They can also be a very useful estate-planning tool.

If you die before you’re 75, the proceeds from your pension can be paid as a lump sum or income to any beneficiary free from tax. If you die after age 75, your beneficiaries will only need to pay tax at their marginal rate on withdrawals.

Irrespective of when you die, the money you have saved into your pension should fall outside your estate and will not normally be subject to IHT.

This means that if you’re worried about IHT, the more money you can pay into your pension, the better. You’ll still have access to it should you need it in your later years, but if you don’t need it, then it can be passed on to your loved ones in a tax-efficient way.

4.Review (or write) your will

The surest way to make sure that your money is distributed as you wish when you die is to write a will.

Most couples who are either married or in a civil partnership leave everything to each other, since this doesn’t usually attract IHT. But if you have a partner who falls outside this category, they could lose out to parents or children if you don’t write a will.

If your circumstances have changed, perhaps following a divorce, you may also wish to amend your will to make sure a new partner can inherit – or if you have remarried, to ensure as much goes to your children and grandchildren as you would like.

Similarly, if you have divorced or remarried, you should also complete a new expression of wishes form for any pensions you have. This will ensure that your pension assets go to the right person or people when you die.

5.Buy life assurance and write it in trust

It’s not always possible to completely mitigate a future IHT bill. After all, you don’t know exactly how your life will pan out and how much of your wealth you’ll need.

One option is to take out a life-assurance policy where the sum assured covers the predicted IHT bill. This spares your family the stress of selling assets to pay it.

For this to work, however, it’s essential that the policy is written in trust. This ensures that the pay-out falls outside your estate for IHT purposes and means that the money is readily available for your executors to settle your estate.

Heir care

You might not relish talking to your loved ones about what will happen to your money when you die. However, facing up to these conversations and coming up with a plan can help secure your family’s financial future and provide you with reassurance.

The end of the tax year is the perfect opportunity to start talking about estate planning with us. Let’s start a conversation today!

The value of an investment with us will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority.