How to reduce your inheritance tax bill
We look at five ways to reduce inheritance tax, and how a financial adviser could help.
Last Updated: 23 March 2023
Chances are that you want your loved ones to get as much of your wealth as possible when you die. But inheritance tax (IHT) means that the taxman may take his share too.
However, there’s a reason IHT is also known as the ‘voluntary tax’. There are numerous ways to reduce it and, in some cases, avoid it altogether.
Here are five ways you could reduce your IHT bill. Keep in mind that tax rules change, and their benefits depend on your circumstances.
This article is here to help guide you, but it isn’t financial advice. As a rule, you should consider taking financial advice if you’re not sure.
We’ll look at how a financial adviser could help with inheritance tax and estate planning later in the article. An adviser won’t perform complex tax calculations or help with your tax return. But they can look at your overall finances and make sure they’re set up to help you save money on tax.
Five ways to reduce your IHT bill
Under normal circumstances IHT is paid at 40% on the value of a person’s estate (their property, money and possessions) in excess of £325,000, although there are circumstances in which this threshold could be as much as £1million. That could wipe out a significant chunk of your wealth if you don’t do anything about it.
Here are five things you can do to try and reduce your IHT bill.
Not sure whether you’ll be affected by IHT?
1. Make a Will
One of the biggest factors in deciding the size of your IHT bill is who will benefit from your estate. A professionally drafted Will is the cornerstone of making life easier for those you leave behind and could save tax. Plus, a Will avoids your beneficiaries having to deal with the awkward rules of intestacy.
2. Use your gifting allowances
Each tax year you can give away up to £3,000 IHT free. But there are lesser-known gift allowances that you can use too. For example, you can give away up to £5,000 when a child gets married (£2,500 for each grandchild), or the unlimited gifts you can make from surplus income. Using your annual allowances can reduce tax liabilities.
3. Make use of your pension
Normally, pensions fall outside of the estate for tax purposes. You can name as many beneficiaries as you like and in most circumstances there’s no IHT for them to pay. And if you die before you’re 75, your beneficiaries can usually withdraw what they like from your pension without paying any tax at all.
4. Gift to registered charities
Not only will you be helping a good cause, giving to charities can reduce your tax liability. Charitable gifts are completely IHT free and can reduce the rate at which IHT is charged on the rest of your estate to 36% if 10% of your taxable estate is left to registered charities.
5. Invest in companies that qualify for business relief (BR)
Certain companies qualify for 100% relief from IHT, meaning there is no IHT to pay. You must have held the shares for at least two years prior to your death to qualify. All investments can go down as well as up in value, though you have a greater chance of getting back less than you put in with BR companies as they are generally riskier and more volatile than larger, most established companies.
Tips to reduce inheritance tax
Find out how gifting, investments and trusts could mean less inheritance tax to pay.
Get an adviser to help with inheritance tax
IHT rules are notoriously complicated. But an adviser can help you understand how they could affect you and how you can navigate them. They’ll also come up with strategies so you can pass on as much of your wealth as possible, in the way you want to.
To find out more about how advice could help, book a call from our advisory helpdesk. They don’t give personalised advice themselves, but they’ll make sure advice is right for you and you’re comfortable with the charges involved. If you’re happy to proceed, they’ll put you in touch with an adviser.