5 simple ways to avoid an unnecessary Inheritance Tax bill - Private Client Solicitors

5 simple ways to avoid an unnecessary Inheritance Tax bill

In our January blog, we highlighted the recent increase in inheritance tax receipts. This is due in part to rising property prices, a 20-year freeze on the “nil rate band” and an increase in HMRC investigations into bereaved families.

Whilst currently less than 4% of estates in the UK are reported to pay the tax charge, for those who are affected, the bill can be huge. More frustratingly for families, it is also often completely avoidable!

Wealthy individuals who may be facing a potential IHT liability on their death can, with some simple and well-timed planning, ensure that their exposure to this tax is reduced significantly, or even avoided altogether. We’ve put together 5 ways in which we regularly advise our clients they can help to mitigate their exposure to IHT:


  1. Write a Will

A well-prepared Will can help to ensure that no inheritance tax is payable on your death, particularly for those with a spouse or civil partner.

Any assets passing to a spouse or civil partner are completely tax-free. If your Will leaves everything to your spouse you can avoid a tax bill that may occur on intestacy (i.e. if you died without having made a Will).

You can also leave the family home to your children or other direct descendants (including stepchildren and spouses of those descendants) to obtain a tax-saving (which is particularly helpful to those who are not married but who do have children). This is thanks to the “residence nil rate band” introduced in 2017. However, this tax-free allowance for the family home is currently capped at a maximum of £175,000 per person and there are certain conditions to be met.


  1. Make lifetime gifts

Lifetime gifting can be a very straight-forward way to reduce the value of your estate for IHT and has the added benefit of allowing you to see your beneficiaries enjoy their inheritance during your lifetime. Gifts above £3,000 may be subject to the “seven year rule” meaning you must survive seven years from the date of the gift to avoid IHT completely.  In addition, you can make a number of other gifts during your lifetime, such as gifts from surplus income, which will reduce your exposure to IHT immediately.

You can make outright gifts or gifts via a protective wrapper such as a trust or corporate structure.  This can assist with preserving wealth for generations to come.

We can provide detailed advice on the various gifting options and rules should you wish to explore these further.


  1. Save your pension

Pensions can be passed on to your chosen beneficiaries completely free of inheritance tax. Therefore, this is one reason to increase your pension pot rather than other savings or investments.  The rules in the recent budget allow wealthy families to utilise this generous allowance to benefit their loved ones.


  1. Take out life insurance and ensure it is written in to trust

If you do have a large exposure to inheritance tax and are not able to instigate some of the other options listed above, an alternative may be to take out an insurance policy to cover the tax bill should it arise.

Life policies that pay out to a deceased’s estate may be subject to inheritance tax on your death. A simple way to avoid this is to nominate the policy into trust during your lifetime, meaning that on your death it falls outside of your estate for IHT purposes.

This applies to any life policies you may already have, and also applies to insurance policies taken out to cover a potential IHT charge. If the policy is not nominated correctly, it will increase the value of your estate and may mean even more IHT becomes due.


  1. Purchase a trading businesses or become philanthropic !

You can purchase a trading business, own it for over two years and then take advantage of “business relief”.  Assets that are able to benefit from business relief can benefit from up to 100% relief against inheritance tax. The business can pass tax free to your loved ones.

You can also gift anything to a UK registered charity, which is also 100% exempt from inheritance tax.

Are you concerned about your exposure to inheritance tax? If so, please do not hesitate to get in touch and our experienced solicitors can discuss the above options with you in more detail.