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It was more than two centuries ago that Benjamin Franklin said there are only two certainties in life: death and taxes.

Despite this being one of the best-known quotes of all time, and numerous methods available to reduce tax liabilities, people in the UK are about to pay the highest amount of inheritance tax that they have ever paid.

It’s clear that the majority of people in the UK are hopelessly under-prepared for inheritance tax. That’s good news for the government: when you die, the biggest beneficiary could be the taxman.

When you die, the taxman throws a party

All your life you’ve worked hard, invested successfully, and paid your taxes. Yet if you die tomorrow and haven’t prepared for the taxman to come knocking, you’ll pay another 40% tax on the value of your estate over £325,000 (the IHT threshold):

  • That nest egg you thought you had left to your loved ones – gone
  • The money you had saved for your children’s or grandchildren’s education – that’s no longer there
  • The family home might have to be sold so the taxman gets his slice of the pie

Most people want to leave their wealth to their loved ones and not the HMRC. But, like the majority, they delay inheritance tax planning. After all, death is a long way off, right? The thing is, accidents happen and ill-health can hit us unexpectedly: we simply don’t know when we are going to die.

The earlier you plan for the certainty of inheritance tax, the less you’ll pay. And that means the taxman gets less and your loved ones get more.

How much Inheritance Tax will you pay?

In the years to 2009, the IHT threshold was raised steadily to £325,000. Since then, this threshold has been frozen, so if your estate is worth more than £325,000 you’ll pay a whopping 40% on any value over this. Your estate includes:

  • Your home
  • Savings and investments
  • Jewellery
  • Art
  • Second homes and investment properties
  • Cars
  • Payouts from life insurance policies

In an act of uncharacteristic benevolence, the government announced a main residence nil rate band that means, by 2020, if your home is worth £500,000 or less you could leave it to direct descendants free of IHT. But what if, at that time, your home is worth, say, £1 million? Your children will have to find £200,000 in tax to receive the home that you left them. And if you haven’t planned for this, the family home might have to be sold, or expensive financing taken to pay the tax bill.

In 2009/10, the taxman took a little shy of £2.4 billion in inheritance tax. In 2014/15, this had risen to more than £3.8 billion. It now appears likely that 2015/16 will see the previous record IHT receipt of £3,823.7 million broken. (HMRC Tax and NIC Receipts, March 2016)


1. Make gifts

You can give a gift of up to £3,000 every year, as either a single gift or in several smaller amounts. This is known as the annual exemption. You can also carry this exemption forward for one year – so for a spousal couple it might be possible to gift £12,000 in a tax year.

You’re also allowed to gift up to £250 to anyone (and as many people as you want) without paying tax on it, though this can’t be to the person that you’ve gifted under the annual exemption.

2. Give someone a PET

In this case, a PET isn’t a cat, dog, or budgie, but is a Potentially Exempt Transfer. Gifts with a large value would normally come under IHT rules if you die within seven years of making the gift, but a PET may be exempt of IHT if you live for more than seven years. If you’re in good health, this is a great strategy to use.

3. Say congratulations to the happy couple

If someone you know is getting married, you can make a gift of up to £1,000 and escape IHT liability. If the happy couple includes a parent or grandparent, then you can make a gift of up to £5,000 or £2,500 respectively.

4. Give some of your income away

Providing it comes from the money that you use for the normal expense of living, you can make regular gifts to others. A great way of building up a grandchild’s savings account, for example.

5. Give to charity in your will

If you have a favourite charity, you might want to make it a bequeathal. When 10% of your estate or more is left to charity, your IHT tax rate is reduced to 36%.

6. Use a trust

There are a number of different types of trust you can use to mitigate IHT. Here are three of the most common:

  • A bare trust is used when you won’t need to change the beneficiaries. The beneficiaries own the assets that are in the trust, and receive income and capital gain. The assets in the trust are accessible when the beneficiaries reach the age of 18 (16 in Scotland).
  • A discretionary trust allows the trustees to invest the assets inside the trust and manage income and capital gain.
  • An interest in possession trust gives the beneficiaries the income but not necessarily the capital. This is useful if you want your surviving partner to benefit from income but your children to have the capital – which becomes available when your partner dies.

7. Buy life insurance

This doesn’t reduce your IHT liability, but used in the right way will ensure the funds are available to pay the tax due. If it is set up in a trust, then life insurance will be outside your estate. You write the policy (either a term policy or whole of life) to pay nominated beneficiaries, who then pay the IHT and gain access to the estate.

What to do now

Financial planning before and after death of a loved one is never an easy process. We don’t like to think about dying, and usually are in no frame of mind to tackle the big issues after a loved one has died. By planning for IHT early, you’ll be better positioned to make use of the 7-year rule as well as making certain that, when the inevitable does happen, your loved ones won’t be stuck with a huge tax bill.

As you can see, there are plenty of strategies available to you, some easier than others. As a general rule, the higher your net worth the more likely it is that you will need to utilise trusts to protect your wealth from IHT. Life insurance should always be put into trust to avoid adding to your IHT liability.

We can work with you and your legal and tax advisors to make sure that every available strategy is used effectively, and that trusts are written correctly to mitigate IHT. Call us today, and we’ll help you take the taxman off your beneficiaries list.