Daniel Defoe wrote there is nothing “as certain as death and taxes” as long ago as 1726 and doubtless he, like many others, would have been shocked by the insensitivity of a tax that is timed to coincide with life’s other certainty. It’s therefore perhaps not surprising that Inheritance Tax (IHT) is the least popular and most emotive tax there is in the country.

Whilst in recent times only a low percentage of estates have had to pay IHT, its reach and impact will significantly increase due to the £5.5 trillion that will pass between generations over the next few decades. Yet, even for people who have significant wealth, it is far from inevitable.

Navigating the ever-changing intricacies of IHT is undoubtedly complicated, but with expert advice and forward planning it’s possible to reduce IHT, or even ensure it will not apply to your estate when the time comes.

“Inheritance tax is a wholly voluntary tax”

* Inheritance tax: what does the future hold? Financial Times, July 2019

Cows milling on a grassy hill overlooking the ocean

The ins and outs of Inheritance Tax

How spending, gifting and investing can reduce IHT

There are several opportunities to reduce IHT. The simplest is to spend more of your money on items that have no asset value like travel and entertainment. Another popular way is to gift money as this can reduce the size of your estate. Gifting is a complex area with numerous allowances and rules that HMRC have put in place. So, it’s important to understand which gifts are exempt, which become exempt after a set period of time, and which can result in an immediate IHT charge.


Investing in assets that are exempt from IHT but remain yours may be suitable in some circumstances. As the rules around IHT can be highly complicated, you should always consider speaking to a professional adviser first. Our Financial Planners can help you make the right choices for your specific circumstances.

Other ways to reduce IHT

Trusts and pensions are two other ways to reduce IHT. Most pensions don’t form part of your taxable estate so they can be a very tax-efficient way of passing on your wealth to your family, especially if you can leave some or all of your pension pot untouched and fund your retirement by other means.


If you die before your 75th birthday, then usually the entire pot can be passed on without your beneficiaries incurring income tax, provided they claim it within two years. If you’re 75 or older when you die, your pension won’t be subject to inheritance tax, but it’s likely your beneficiaries will have to pay income tax at their marginal rate.


Trusts are a good way to pass on money, especially if you feel your beneficiaries are too young to be able to cope, too irresponsible to be able to use it wisely, or you feel the money could end up in the wrong hands. In these circumstances you can make a gift in a discretionary trust that allows you control, even from beyond the grave, when and how they can use the money. Many trusts are quite complex, so it pays to get advice on the various options available.

Can I insure against IHT?

Life assurance has long been a popular choice among people looking to offset their Inheritance Tax liabilities. You can take out a life assurance policy, written in trust, that will provide your beneficiaries with a pre-agreed lump sum when you die.


This lump sum, which remains outside of your estate, can cover all or part of the Inheritance Tax bill and ensures your family or other beneficiaries don’t need to find the cash to settle the tax bill by selling off assets such as your property.


How Business Relief can reduce IHT

If you own shares in unquoted companies such as those listed on the Alternative Investment Market (AIM), own a business or have an interest in one, you may be able to reduce your IHT bill.


You will need to have owned the assets for at least two years before you can claim Business Relief on them, but there is no limit to the amount that could be passed on after your death. You may also get 50% Business Relief on any land, buildings or machinery owned by a business in which you have an interest.


The rules are complex and there are a number of exceptions, and investing in smaller companies can pose a higher risk, so it always better to seek advice where the full range of Business Relief options available can be considered.

Gifting & the seven-year rule

Some gifts are excluded from the value of your estate and become exempt from IHT if you live for seven years or longer after the date you originally gave the gift. Known as Potentially Exempt Transfers (PETS), there is usually no restriction on the size of these gifts.


In the event that you die before the third anniversary of your gift, if there’s any Inheritance Tax to pay, it will be charged at 40%. However, gifts made three to seven years before your death benefit from taper relief which is taxed on a sliding scale from 32% down to 8%, based on the time between the gift and your death.


Years between gift and deathInheritance Tax paid
less than 340%
3 to 432%
4 to 524%
5 to 616%
6 to 78%
7 or more0%


Is it likely I will leave an IHT liability?

Inheritance Tax is a tax on the combined value of all your property, possessions, investments, savings, cash and any other types of assets that fall within your estate. It is payable when those assets are transferred to members of your family or other beneficiaries. The standard threshold or nil rate band for IHT is currently £325,000, beyond which you will typically pay 40% IHT. If your estate is worth more, you can leave it all to your spouse or civil partner without incurring the tax.


There is also an allowance called the Residence Nil Rate Band (RNRB) that applies if you pass on your family home to direct descendants. The RNRB was increased to £175,000 in April 2020, and is reduced for people who have estates that are valued at over £2 million. Both allowances can be transferred between married couples and civil partners when one partner dies.

Elderly couple smiling at each other on a windy coastal lookout
John & Kath, North-West region

With careful planning and guidance over a number of years, we've managed to reduce our inheritance tax liability by over £1,500,000 which we can now thankfully pass on to our loved ones.

See how we can help

Passing on your wealth

Should all your children be treated equally? Who gets your money if you don’t have immediate family? Should your wealth skip a generation? Will children or grandchildren be better off in life if they have to build their own futures?

Find out what your Inheritance Tax liability might be

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