5 quick tips for paying less Inheritance Tax as IHT receipts hit a record high

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Often called “the country’s most hated tax”, Inheritance Tax (IHT) can seriously reduce the value of an estate left by a loved one.

In recent years, the amount of IHT families are paying has increased sharply. Indeed, HMRC collected a record £6.1 billion in IHT in the 2021/22 tax year – that’s 14% more than the £5.4 billion collected in the previous year.

The total number of UK deaths that resulted in an IHT charge has also increased. Data from HMRC shows there were 23,000 such deaths in the 2019/20 tax year – an increase of 4% on the previous year.

With the former chancellor, Rishi Sunak, having frozen the IHT nil-rate bands until 2026, more and more estates are set to face a tax charge as rising house prices and asset values push more families above the IHT threshold.

So, if you’re concerned about a possible IHT bill, here are five quick tips for mitigating the tax.

1. Think about “giving while living”

Generally speaking, any gift you give will fall outside the value of your estate if you survive for seven years after making it. This is called a “potentially exempt transfer” (PET).

Gifting to family earlier in your life can have two benefits:

  • You’re more likely to survive for seven years after making the gift, meaning it falls out of your estate for IHT purposes
  • The recipient of the gift may receive it at a time in their life where it could be more valuable. For example, gifting to a child now could enable them to buy a home, while gifting on your death might mean your children are in their 50s or 60s when they receive the inheritance.

We can use cashflow modelling to establish whether making gifts now would result in a shortfall either now or in later life. This can give you the confidence to make gifts without damaging your long-term prospects.

2. Use the residence nil-rate band

Back in 2017, the government introduced an additional exemption from IHT. The “residence nil-rate band” enables you to gain IHT relief of up to £175,000 if you leave your home to a child or grandchild.

So, if you own your home and you want to pass it to your children or grandchildren, you can utilise the residence nil-rate band in addition to your normal nil-rate band. This means that no IHT will be due if the total value of your estate is below £500,000.

Note that, if the value of your estate is more than £2 million, the residence nil-rate band is reduced by £1 for every £2 of value by which the estate value exceeds the £2 million threshold.

Making a will and specifying that your home should pass to your direct lineal descendants can be a useful way of ensuring you make the most of this additional nil-rate band.

3. Use your gifting allowances

Every individual benefits from several IHT gifting allowances. Using these means that the value of the gift immediately falls outside your estate for IHT purposes:

  • The annual gifting exemption – £3,000 in the 2022/23 tax year. You can carry forward any unused allowance from the previous tax year
  • Wedding gifts – each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person
  • Gifts you give to charities or political parties
  • As many small gifts of up to £250 as you like, as long as you have not used another allowance on the same person.

Making the most of these allowances can help you to mitigate a potential IHT bill.

4. Consider trusts

A trust is a legal arrangement where you give assets to someone else so they can look after them for the benefit of a third person. For example, you might put some of your savings aside in a trust for your children or grandchildren.

If you put property, cash or other assets into a trust, provided you meet certain conditions, they no longer belong to you. So, when you die their value normally won’t be counted when your IHT bill is calculated.

Of course, using a trust generally means giving up control of an asset, so it’s not a step to take lightly. We can help establish whether using trusts is a good option for you.

5. Gift from income

To reduce a potential IHT bill, you can also make gifts from income – perhaps to help with another person’s living costs. You can gift as much as you like, providing:

  • Your gifts are from income, not from capital
  • You can afford the payments without diminishing your own standard of living
  • The gifts are regular.

You can use this exemption to, for example, provide financial support to an elderly relative or to pay into a savings account for a child under the age of 18.

If you choose to use this exemption it’s important that you keep good records, so HMRC can see you fulfilled all the requirements above.

Get in touch

If you’re concerned about a potential IHT bill, and losing 40% of your estate to tax, please get in touch. Email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

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

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.


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