How to reduce your inheritance tax bill

15 June 2022

How to reduce your inheritance tax bill


Personal Tax Planning,

Wealth planning & Private client

No one likes thinking about inheritance tax but if you take action now you can vastly reduce how much HMRC will take from the fruits of your labour.

Procrastination is the thief of time, and this is never truer than with those ‘get your ducks in a row before it’s too late’ jobs, such as making a will. Up until Covid, most people didn't want to think about inheritance tax, but the pandemic forced everyone to think about their mortality and realise that it has nothing to do with age and can come out of nowhere. But getting your affairs in order doesn’t have to accompany depressing thoughts about mortality.  What you are essentially doing is planning to have your best life, making sure you've got enough money and, in the event that something happens, ensuring that your wishes are carried out while saving tax in the process.


The IHT threshold

So, what do you need to know? Well, the first £325,000 of your estate is tax-free. Given that statistics from the ONS show that the average house price in England is £296,000, with millions living in houses worth considerably more, this isn’t as much as it sounds. But don’t panic, there’s then the residence nil rate band, which is set off against the value of your estate ahead of the NRB and currently entitles another £175,000 to be included. At its simplest, this means a married couple can pass up to £1 million on to their children free of inheritance tax where the RNRB applies.

Anything more than the NRB and RNRB will be taxed at 40% (with the sliding tax rate for gifts in the last seven years), so what practical measures can you take now to reduce the tax liability?


Take a good look at yourself

The first thing to do is actually look at what your possessions are and what the value of your assets are. In my experience, people are often surprised at what is taken into account. It includes property, bank accounts, investments, shares, ISAs, antiques, jewellery, personal chattels, vehicles, life insurance (not held in trust) and gifts (made in the past seven years).

Then you need to understand where you are in life. We will often do a cash flow projection to look at where you are in terms of whether you're working, whether you plan to retire and what you intend to do when you retire. Most people spend a lot when they first retire because they have a list of all the things they want to do, whether it’s taking up a new hobby, travelling or even moving to another country. Between 75 and 80, there tends to be less expenditure, but from 80 onwards it rises again because you need more money for care. So you need to consider all these factors and then match that against what your assets are. Then you need to make a plan in terms of what you need. The rest is the bit that will be subject to IHT and you can take action now to limit the tax liability, such as using vehicles such as a trust or a Family Investment Company.

You can also make gifts, although many people struggle with giving away assets which take away the incentive for people to work, so will often gift in the thousands rather than give away hundreds of thousands.


A voluntary tax

Generally, I think of IHT as a voluntary tax. If you’re really active in reviewing and planning and you end up ultimately paying less tax, the government is quite happy for you to do so.

And it’s crucial to do that planning ahead of time because inheritance is one of those issues that can divide families at a time that is already stressful and emotional. 

By acting sooner rather than later, you can limit both the danger of a fracture in the family and also how much money HMRC will get. It’s a win-win situation.


If you want to find out how to mitigate your inheritance tax liability get in touch with our tax team below: