News & Views

Inheritance tax – planning for the future

10th February 2023

The recent freeze on the inheritance tax (IHT) threshold is seen by many as another stealth tax by the government. Essentially by keeping the threshold the same, while the value of assets continue to rise will mean more revenue for the treasury.

Official figures in January showed the Treasury is on course to collect record sums from death duties this tax year. Bereaved relatives paid £5.2bn in IHT between April and December 2022, £700m more than in the same period in the year before, according to HM Revenue & Customs.

Revenue from IHT in 2022-23 is almost certain to surpass the record £6.1bn raised in 2021-22 once the data for the remaining months of the tax year is collected.

What IHT reliefs are available

The good news is that it is possible to legally pay very little IHT but you need to plan well ahead for this to happen.

Let’s start with a quick reminder of what inheritance tax (IHT) is and what the thresholds are.

  • IHT is a tax on the ‘estate’ of someone who’s passed away.
  • the deceased’s estate is worked out based on their assets (cash in the bank, investments, property or business, vehicles, pay outs from life insurance policies), minus any debts.
  • there is normally no tax to pay if:
    • The value of your estate is below £325,000 (the current IHT threshold), OR
    • You leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club
  • your estate will be taxed at 40% on anything above the £325,000 threshold when you die

So, how can we help reduce the amount on IHT that you pay. Here’s a typical example.

Your estate is valued at £525,000 which includes the value of your home. If you weren’t leaving your home to your family, you’d pay nothing on the first £325,000 of your estate, and 40% on the remaining £200,000, meaning a total of £80,000 to pay in inheritance tax.

If, however you were to leave your home to your descendants you can take advantage of the “residence nil-rate band” which is an additional allowance of £175,000. So, the calculation now looks like no inheritance tax will be charged on the first £500,000 (£325,000 basic allowance + £175,000 main residence allowance). There’ll be a 40% charge on the remaining £25,000, giving a total of £10,000 in tax.

That’s a saving of £70,000 in IHT. Of course, leaving your property to your descendants is not always an option, so how else can we pay less IHT?

Other IHT saving options include:
  • You can give £3,000 away each tax year inheritance tax-free
  • Gifts to charities and political parties are inheritance tax-free
  • You can give £250 each year to everyone you know
  • You can give away money from income without having to pay tax (as long as it doesn’t affect your lifestyle
  • Wedding gifts (up to a limit) are tax-free
Give your money away!

Normally if you gift money away before you die, it is still counted as part of your estate – unless you live for a further 7 years or more after making the gift. People you give gifts to will be charged inheritance tax (on a sliding scale up to a maximum of 40%) if you give away more than £325,000 in the seven years before your death. It is possible to do this by using a trust which may allow you some access to your gifted capital.

Insure your liability

It is possible to take out a whole of life assurance policy written in trust for your beneficiaries based on the likely IHT bill your estate may pay. On death the IHT becomes chargeable on the estate but your beneficiaries are compensated for the tax paid by receiving the proceeds of the life policy.

The younger you are, the less expensive the premium cost of the life assurance policy is so it’s more appropriate if you are making plans earlier.


IHT Exempt Schemes

A very popular approach is to invest in Business Relief IHT Schemes which are investments in private company shares. By retaining the scheme for 2 years leaves it exempt from IHT while still allowing you to access to the value of your investment as and when you need it. Although you will own a portfolio of shares, many of the shares are using assets that provide predictable long-term returns such as wind, solar and hydro projects targeting around 4% per annum,

Of course, there are caveats in some of the above and that’s why you need to speak to a financial adviser to help navigate through the options that are available to you.


Planning for the future

It’s not difficult to see that that the value of your estate can quickly rise over time as property prices continue to climb as do any investments you may have. While at the same time the IHT threshold stays the same meaning that you are likely to be paying much more tax on your death.

The message is therefore clear, plan well ahead to offset as much IHT as you can.


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

If you are interested in learning about what makes RobMac different and think that we can help, then please get in touch. If you would like to discuss your financial position or mortgage further, you can arrange to meet online with one of our financial advisers by scheduling a meeting here >>