Key steps to minimise your Inheritance Tax bill

Official figures published by HMRC showed that in 2021/22, Inheritance Tax (IHT) receipts stood at £6.1 million. This means that receipts have nearly doubled in the last ten years (from just under £3 million in the 2011/12 tax year).

More and more people will need to consider how IHT could affect what they leave to their families.  In 2021 the chancellor froze two key thresholds for IHT for the next five years.

  • The IHT nil rate band for the 2022/23 tax year is set at £325,000 and will remain at this level until 2026. If the total value of your estate is below this threshold, your estate will not be liable to IHT.
  • The IHT residence nil rate band is available to you, if you will be passing your main home to your children or grandchildren. This allowance is set at £175,000 for the 2022/23 tax year and again will remain at this level until 2026.  It’s important to remember this allowance reduces where the value of estate exceeds £2 million.

Both of these thresholds are for individuals.  So, if you are planning with your spouse or civil partner, and with allowances transferrable between spouses and civil partners, you could pass up to £1 million on second death.

You do, however, need to factor any gifts you have made previously, as these could potentially reduce the value of the nil rate band.

If the value of your estate (after gifts) exceeds these allowances, the standard IHT rate is 40% on the amount above the allowances.  This could potentially significantly reduce the legacies to your beneficiaries.

Key steps to minimise your inheritance tax liability might include: 

Step 1: Value your estate

To understand the extent of the problem, you first need to calculate the value of your estate.  Work out what’s included in your estate and how much it is worth.  It’s important to use accurate valuations.

Step 2: Write a will

Even if you don’t have an IHT liability, writing a will is important to ensure that your estate is left in line with your wishes.  Without a will in place, the rules of intestacy will apply.

If there are charities close to your heart, you can leave legacies in your will.  These gifts are not liable to IHT.  Additionally, if you leave at least 10% of your net estate to charity, the rate at which is IHT is payable on the balance of your estate reduces from 40% to 36%.

Step 3:  Gifting

Known as chargeable lifetime transfers or potentially exempt transfers, some gifts may be considered part of your estate if you pass away within seven years.

However, various allowances are available to you and some gifts are considered outside of your estate immediately, for example the £3,000 annual exemption. Making use of these allowances can allow you to pass assets without worrying about IHT implications.

Step 4:  Use trusts

Using a trust may remove some assets from your estate.  They will not be considered when calculating IHT, so long as you survive seven years from the date of the gift.

The type of trust you use will ultimately depend on your needs and objectives and whether you might, or might not, need access for yourself during your own lifetime.  Trusts can be difficult to dissolve, so it’s important to take legal advice.

Step 5: Life insurance

A whole of life insurance policy will pay out a lump sum when you pass away.  It won’t reduce the IHT liability, but it will provide a lump sum that could be used towards the IHT liability.

You will need to continue premiums on the policy for your lifetime to ensure continued cover.  It’s also important that the plan is written in trust.  Otherwise, the payment will be considered part of your estate, only increasing the IHT payable.

Step 6:  Arrange a meeting with us

Depending on your assets and wishes, there may be other options that are appropriate for you.  Please contact us to arrange a meeting to discuss the steps you can take to reduce the amount of IHT due on your estate and pass on more of your wealth to loved ones.

Please note:  This blog is for information only and does not constitute advice.  The information is aimed at retail clients only. 

The Financial Conduct Authority does not regulate tax or estate planning


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