How to reduce Inheritance Tax (IHT)

The UK Government received more than £6 billion in the 2021/22 tax year from Inheritance Tax. This was up from £5.3 billion the previous year, and with the exception of a five year period between 2010 and 2015, the total tax take from IHT has been steadily increasing since the turn of the century, nearly trebling in 20 years.

If you’re in the process of writing a will or starting to talk to you family about what your estate looks like, then you may be asking yourself how you can reduce the amount your heirs will be paying in IHT. Having spent so many years working to build an estate and paying tax on the income whilst doing so, for many the idea of their children or beneficiaries having to pay a further amount of tax on death feels like a bitter pill.

Property Prices Driving the Increase

With property prices rising significantly and generational wealth building as a result, more estates are falling foul of IHT thresholds. Houses that were purchased for just a few thousand in the sixties and seventies are now worth hundreds of thousands and those who worked hard to buy them are inadvertently finding themselves asset rich. Its only taken two generations for significant wealth to build in most families and the growth in IHT since 2000 shows how this is trickling down to impact those of working age today.

But whilst property is undoubtedly fuelling the increase in the value of estates, it typically also represents the vast majority of the overall value, making it one of the hardest things to solve when it comes to IHT planning. Ideally, you’d start the transfer of assets earlier so as to navigate the 7 year rule – the period prior to death in which some IHT may still be due on any asset transfers that take place – but it’s not that straight forward to handover a property in chunks, especially if you want to continue living in it.

Top 5 tips for good IHT planning

  1. First, and probably the most important tip, is to start early. If you’re serious about sharing your wealth with your family, not the tax man, you need to plan ahead. The 7 year rule (above) applies and it’s often easier and more practical to trickle the money to subsequent generations rather than in bigger chunks.  
  2. Be realistic – what happens if you make it to 100 with associated care costs – or simply good living? Whilst trying to reduce the value of your estate to avoid IHT, you need to ensure you keep enough for yourself – after all, it is your money!
  3. Skip a generation – Don’t just think about the children. A lot of the most efficient ways of sharing wealth to avoid IHT actually involve grandchildren e.g., paying for schooling, setting up investment trusts or starting a pension for them.
  4. Think laterally – If you’d rather hand the money to anyone other than the tax man, then consider charitable donations or trusts. Whilst your offspring may be able to put the cash to good use, you may have wishes to leave an alternative legacy.
  5. Don’t substitute one tax for another – Whilst you can legitimately transfer assets, such as properties, before you need to, any transfer of property / assets may trigger a Pre-Owned Asset Tax (POAT) or Capital Gains Tax (CGT) charge and therefore it is essential to seek advice on this before any action is taken.

Go ‘Skiing’

Of course, the concept of Inheritance and Inheritance Tax doesn’t concern everyone and some will determine that once they’re gone, it’s not their problem. So, the ultimate way to reduce your inheritance tax bill is to reduce the overall value of the estate – an activity amusingly referred to as ‘Skiing’ or Spending Kid’s Inheritance….

As Warren Buffet famously suggested “You should leave your children enough so that they can do anything, but not enough that they can do nothing”.