5 ways to pay less Inheritance Tax and leave more to your loved ones

Category: News

Often purported as the “UK’s most hated tax”, Inheritance Tax (IHT) can have a considerable effect on the value of an estate you leave to your loved ones.

In recent years, the amount of IHT that people across the country are paying has increased substantially. Indeed, the Financial Times reports that HMRC took a record amount from IHT in 2022/23, raising £7.1 billion through the tax.

This can be partly attributed to the fact that property prices have risen substantially in recent years, and the fact that the nil-rate band – the £325,000 threshold before you incur IHT – has been frozen since 2009 and will remain at this level until April 2028.

Moreover, there have been calls recently to scrap IHT altogether, with 50 Conservative MPs launching a campaign to abolish the tax, and the former chancellor, Nadhim Zahawi, calling it “morally wrong” in an article for the Telegraph.

So, if you’re concerned about these rising IHT receipts, read on to discover five helpful ways you can potentially mitigate the tax and pass more on to your loved ones.

1. Use your gifting allowance

One way of mitigating the amount of IHT your loved ones might pay is to make gifts each tax year that could help you reduce the value of your estate. The value of some gifts immediately falls outside your estate for IHT purposes.

These gifts include:

  • A total of £3,000 as part of your annual gifting exemption as of the 2023/24 tax year. If you don’t use this one year, you can carry it forward to the next.
  • An unlimited number of £250 gifts, so long as you haven’t already used some or all of your annual gift exemption on the same person.
  • A tax-free wedding gift to someone getting married or entering into a civil partnership. You can typically give £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
  • Anything you give to a registered charity or political party.

Making the most of these allowances can help you to reduce the value of your estate, potentially reducing a potential IHT bill.

2. Consider “gifting while living”

If you wish to make a more substantial gift, you may want to consider using a “potentially exempt transfer” (PET). This allows you to gift an unlimited amount to anybody you desire, but you must live for seven years after making the gift for it to fall outside your estate.

The rules governing PETs mean gifting to your loved ones earlier in your life can be beneficial, as you’re more likely to survive for seven years after you make the gift.

What’s more, the recipient of the gift may receive it at a time in their life when it could be more valuable for them. For instance, if you gift to a child who is a young adult now, this could help them get on the property ladder, while gifting on your death may mean your children are older when they receive the inheritance.

It’s important to note that if you don’t survive for seven years after the gift, it may become liable for “taper relief”, a sliding scale of IHT, depending on how long you lived.

3. Donate some of your wealth to charity

As well as using your gifting allowances, you can also donate money to charity to reduce the value of your estate and mitigate an IHT bill. Any donations you make to a registered charity fall outside your estate for IHT calculations.

Additionally, if you leave more than 10% of your net wealth in your will to a charity, this can typically reduce your estate’s IHT charge from 40% to 36%.

This is mutually beneficial, as the charity will receive a bequest, and your heirs will pay a lower rate of IHT on your estate.

It’s worth remembering that the rules surrounding charitable legacies are complex, so speak to a financial planner first to ensure you understand the rules and don’t accidentally trigger an unexpected tax charge.

4. Place assets in a trust

A trust is essentially a legal arrangement where you give your assets to someone else so they can look after them for the benefit of a third party. For instance, you may put some of your savings aside in a trust for your children or grandchildren to access when they reach a certain age.

You can place property, cash, and other assets in a trust so long as you meet certain conditions, and the assets will usually no longer belong to you. So, when you pass away, their value typically won’t count towards the value of your estate when your IHT bill is calculated.

Of course, to use a trust, this means you need to give up control of an asset. We can use sophisticated cashflow modelling techniques to forecast your future financial position to establish whether gifting assets through a trust would be the right move for you.

5. Consider using your pension funds

It’s important to note that not all assets count towards the value of your estate when it comes to IHT. For example, pensions aren’t usually included in your estate for IHT purposes.

If you have a defined contribution (DC) pension, you can typically pass this to a beneficiary IHT-free. If you die before age 75, they will inherit it with no Income Tax liability while, if you die after the age of 75, they will pay tax on this at their marginal rate.

If you don’t access a pension pot and instead leave it to a loved one, this may allow you to pass wealth without an IHT liability. As such, you may want to draw a later-life income from savings and other IHT-liable assets before you access your pensions.

Get in touch

We can help you create an estate plan that can mitigate your IHT liability so you can pass more of your legacy on to your loved ones.

Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial planners can help you.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.