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Inheritance tax planning guide - the basic facts about reducing IHT legitimately

In our Inheritance Tax Planning Guide, we cover some of the basics you need to know if you want to start to manage your potential inheritance (IHT) liability. If you want more personal advice for your individual situation, or your estate is complicated, our inheritance tax planning service provided by our independent financial planners is here to help. 

If you’re reading this IHT Planning Guide, you’re probably part a family likely to be affected by IHT, which is now catching more and more people. At the beginning of 2016, the number of UK families paying inheritance tax was at a 35-year high, as rising house prices pushed the value of family assets above the tax threshold. While this number has recently been driven down by the introduction of the new residence nil-rate band allowance (which added £175,000 the inheritance tax nil-rate band in April 2020, subject to certain conditions), we are still regularly asked for our advice on how to legitimately reduce inheritance tax. This IHT Planning Guide covers some of the basics so you can consider what these changes, along with myriad other tax complexities, mean to you and your family – and whether you would like to seek further advice to create a robust inheritance tax plan.

What is inheritance tax (IHT)?

Inheritance tax, or IHT for short, is in simple terms a tax payable on the assets (money or possessions) you leave behind when you die, so it’s often referred to as ‘death duty’. The assets making up your estate can include:

  • Cash and savings in the bank
  • Investments
  • Property and valuables, such as art, jewellery etc.
  • Vehicles
  • Businesses you own
  • Pay-outs from life insurance policies not held in trust

Many estates that are now subject to IHT in the UK belong to those who would not necessarily call themselves wealthy – in fact it is only if the value of your estate is below the threshold of £325,000 there is no IHT to pay. Countries such as the United States have their equivalent nil rate bands set much higher; up to US$10 million if structured correctly. Australia has no inheritance tax at all.

When was IHT first introduced in the UK?

Modern IHT was first introduced as estate duty in 1894 as a tax on the capital value of land, although there are earlier examples of similar taxes. Like most taxes, it was introduced to close a large budget deficit. The tax has taken many guises since then, until in 1986 it was reintroduced as the inheritance tax regime that we know today.

Estate duty was originally intended to be a tax on the very wealthy. But rises in property prices and stagnant nil rates bands have meant that many more estates fall prey to inheritance tax today; approximately 8% of all death estates last year.

What are the current IHT rates?

IHT is charged at a rate of 40% on assets passed to beneficiaries (other than a spouse or civil partner) over and above the ‘nil rate band’ of £325,000.

A new separate allowance, ‘the main residence allowance’ was introduced in 2017 which applies when someone leaves their main residence to their children or grandchildren. This allowance is currently £175,000 meaning an individual’s allowances could reach up to £500,000 before their heirs have to pay IHT. This new allowance is reduced for estates worth more than £2m and subject to certain conditions.

Who pays the IHT bill?

Funds from your estate are usually used to pay your IHT liability to HMRC. This is done by the executor dealing with your estate after your death. If you make certain kinds of gifts during your lifetime, but die within seven years after making them, the recipients of the gifts may be liable to pay IHT.

How can I legitimately reduce IHT?

There are ways that you can legitimately reduce or even fully mitigate the impact of IHT. Here are some of the options:

  1. Spend or give it away – this is the simplest and easiest option. If you give money or assets away, you have to survive for seven years after the date of the gift, or it will still be included in your estate. However, it’s important not to give everything away as you still have to live yourself.
  2. Give away your excess income regularly – unspent monthly income is simply increasing the size of your estate. Instead, distribute it among family, friends or charities – or spend it on life cover.
  3. Arrange life assurance – this is another simple way of mitigating the impact of an IHT bill. The premium and amount of cover will normally be fixed, giving you control of your estate, rather than having to make substantial gifts. You can use the annual £3000 exemption or surplus income to fund the cost of cover.
  4. Set up trusts – this is important if you want to keep control of your capital. Some trusts will pay a fixed level of income, while others can offer additional benefits, such as protection for your beneficiaries from divorce or bankruptcy.
  5. Look into specialist investments – it’s possible to invest in a range of permitted UK companies and achieve IHT exemption after only two years by attracting Business Relief. This is a higher-risk approach when compared to the alternative options, but it offers quick relief and you don’t have to give any assets away –which means you have ongoing access to your capital.

IHT rules are complicated and no one likes thinking about their own mortality. However, not making arrangements could affect your family.

Plan now to build your confidence in their future. If you’d like some more specific IHT planning advice, you may want to read up on the services we provide at Canaccord Genuity Wealth Management or alternatively contact us for a free consultation to discuss your options.

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The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Photo of David Goodfellow

David Goodfellow

Head of UK Financial Planning

David specialises in financial planning and tax driven investment planning. He has over 15 years' experience in advising on and investing in VCTs, EISs and tax driven property structures, and is part of the CGWM Advice and Solutions Committee. He is a member of the Personal Finance Society and The Chartered Insurance Institute.


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Investment involves risk and is not suitable for everyone.