3 practical ways you can avoid being caught in the growing Inheritance Tax net

Inheritance Tax

a consultant going through paperwork during a meeting with man and woman in office

In recent years, a growing number of estates have been subject to Inheritance Tax (IHT), and more money is being taken by HMRC in IHT than ever before.

According to the UK government, in April 2021 to March 2022 IHT receipts totalled £6.1 billion, £0.7 billion higher than the same period a year earlier.

More estates are paying IHT because the thresholds at which the tax becomes due have remained the same since 2009, whereas estate values have risen dramatically.

Most of us would like to think of our hard-earned estate going to our loved ones, rather than to HMRC. The good news is that there are ways to plan ahead and reduce the amount of IHT your beneficiaries will have to pay on your estate.

Some strategies are best implemented early, and as life – and death – is unpredictable, it’s never too soon to think about it. Planning for your death isn’t easy, but to ensure your family are taken care of, it’s advisable to seek financial advice sooner rather than later.

Read on for three ways to avoid being caught in the growing IHT net.

3 ways to mitigate IHT

1. Gifting

While some gifts that you make while you’re alive could still be subject to the tax, there are many exemptions, making gifting an effective way of protecting your estate from IHT.

The annual exemption means that you can gift up to £3,000 each tax year, either to one person or split between several, and that gift will fall outside your estate immediately. You can also carry forward any unused allowance from the previous tax year, for example by gifting £6,000 in one year if you didn’t gift any the previous year.

Beyond the annual exemption, you can typically gift any amount of money or assets, to whomever you choose, providing you live for seven years after the date of the gift.

If you die within those seven years, the potential IHT charged on the gift is tapered, so the further into those seven years you are before you die, the less the gift will likely be taxed.

2. Pensions

When you die, any defined contribution (DC) pension you have not yet drawn will normally go to your beneficiaries. They can choose to withdraw it as a lump sum, or gradually as a regular income.

As pensions do not normally form part of your estate for IHT purposes, no IHT will usually be paid on any pensions you leave on your death.

As pensions are generally free from IHT, it can make sense to draw your retirement income from other sources – such as ISAs or other investments – before you start to draw your pension.

By doing this, you may be able to deplete the portion of your estate liable to IHT and, instead, pass these pensions tax-efficiently to your beneficiaries.

3. Donations to charity

Many people choose to make a donation to charity in their will. And, any funds you give to charity, whether while you’re alive or after you die, is not subject to IHT.

Additionally if, upon your death, you give more than 10% of your net estate to charity, the IHT rate payable on the rest of your estate will reduce to 36%.

If your goal is to reduce the amount of your money that your heirs pay in IHT, giving to charity is a great way to achieve this.

Get in touch

To preserve as much of your estate as possible for your beneficiaries, and to allow yourself peace of mind that they’ll be taken care of after your death, seek advice from a professional adviser. They will look at your estate in detail and help you plan for the future.

If you’d like to find out more about mitigating a potential IHT bill, please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

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