News & Views

8 point guidance to inheritance tax

1st June 2023

In our series of recent series of articles about recent changes to financial legislation, Jeff Lewis looks at 8 key points to do with inheritance tax  (IHT).

Here’s the basic definition for IHT in the UK.

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

Jeff says “There are however a number of things that you can do to mitigate against the amount of IHT that you need to pay. Here’s 8  top tips”.


1. Make gifts

One of the simplest things you can do to avoid paying inheritance tax (IHT) is to spend your money, or give it away, during your lifetime. No tax is due on any gifts you give, as long as you live for seven years after giving them.

If you were to pass away within seven years of making the gift, the IHT amount may be reduced due to ‘taper relief’.

Each tax year, you’re allowed to give up to £3,000 worth of gifts, split between however many people you like – this is known as your ‘annual exemption’. You’re also allowed to make unlimited gifts of up to £250 to others, too – as long as you have not used another allowance on the same person.

You can also carry any unused annual exemption forward to the next tax year – but only for one tax year.

If you’re off to a wedding, you can give up to £1,000 as a gift without needing to worry about inheritance tax. You can give more to relatives – £2,500 to grandchildren, and up to £5,000 to your children. For the gift to exempt from IHT, it must be made before the wedding, and the wedding must go ahead. Otherwise, the gift will be classed as a potentially exempt transfer.

If you make gifts above these thresholds, they will count as part of your estate and may be taxable if you don’t survive for seven years after making them.


2. Leave money to a charity

Any money you leave to a charity, providing it is registered in the UK, will always be free from inheritance tax. The same goes for gifts to political parties, or to local sports clubs.

What’s more, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will fall from 40% to 36%.

The 10% only applies to the amount of your estate over the IHT allowance. So, for example, if you were leaving behind £425,000, you would benefit from the lower rate if you gave more than £10,000 (10% of the amount over £325,000).


3. Leave your estate to your spouse

Your spouse or civil partner will never have to pay tax on assets you leave them, regardless of the amount. Making the most of this in your will can save your family a small fortune.

When your spouse then passes away, they’ll have inherited your unused IHT allowance, potentially allowing them to pass on up to £650,000 tax-free.

If they (or you) have remarried, then unused personal allowances can be added together and passed on – but only up to the value of one whole personal allowance (i.e. the most it can increase by is £325,000).


4. Use property allowances

If you leave your home to your children or grandchildren in your will, then property allowances will increase your tax free threshold by £175,000 for the current 2022-23 tax year (for a total of £500,000).

For a married couple combining their allowance and leaving their home to their children or grandchildren, this means passing on estates of up to £1,000,000 completely free of IHT.


5. Consider equity release

If all your wealth is tied up in your property, you may not be able to make use of gifts during your lifetime, or spend your wealth on yourself. To get around this, some people take out an equity release scheme.

It’s important to remember that all this really does is reduce the assets you own, and increase the debts that will count against your estate. If you don’t need to access cash from your property, giving assets away earlier is likely to be better for you.

When you die, the value of your estate will be reduced, either by the mortgage debt (with a lifetime mortgage) or because only part of the value of your home will still belong to your estate (with a home reversion).


6. Take out a life insurance policy

If you can’t reduce an IHT bill, you can insure against it. Life insurance is one of the simplest ways of covering an unwelcome bill, but unless you’re relatively young and healthy, policies can be expensive.

Providing the policy is written into trust, the payout won’t form part of your estate.

HMRC treats the premiums paid to the insurance policy as a lifetime gift, if you pay them yourself. However, these can usually be covered by one of the tax-free exemptions – either the annual £3,000 exemption, or the ‘gifts out of normal income’ exemption.


7. Consider a Deed of Variation/Family Arrangement

A deed of variation allows your heirs to alter your will  after your death so that, for example, part of the inheritance is re-directed to someone else.

They can draw up a deed of variation within two years of your death, but all affected beneficiaries under the will must agree to the variation.

This can be difficult in practice, especially if there are many beneficiaries.

As a general rule, it’s better to review your will periodically so that your affairs are tax-efficient and don’t require your heirs to make changes after your death.


8.Invest in a Business Relief Scheme

By investing in a scheme of private company shares the investment will be exempt from IHT after  being held for 2 years  . The providers of such schemes generally target a return for investors of between 3 and 5 % pa in addition   you will  have complete access to your capital at all times.

This is very often the simplest and most tax efficient way of reducing your estate , it can also be done using a Power of Attorney   which can assist an elderly relative pass on more of their wealth to their beneficiaries at a later stage in their lives .

Here’s the links to all four articles:



* The value of an investment may go down as well as up, and you may get back less than you originally invested.


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