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Inheritance Tax Planning

Inheritance Tax Planning

Ian Winterbotham talks about inheritance tax planning.

What is inheritance tax?

It’s one of the biggest things on people’s minds at certain times, so I’m going to be really specific and pedantic about it.

In this country, inheritance tax (IHT) is not a tax on the amount people receive as an inheritance. It’s a tax on the value of one’s assets when you die. It’s actually a tax on your estate.

In the UK, inheritance tax is levied once someone has passed away, based on property, money or any other possessions anywhere in the world

If the value of the estate is below £325,000, no inheritance tax is payable. This limit is known as the Nil Rate Band threshold. If there is no additional allowance available and the estate exceeds this threshold, then standard IHT would apply at 40% on everything above £325,000.

There is an additional allowance that George Osborne introduced of an additional £175,000 if you pass your home to direct descendants – your children or grandchildren. In this case, the threshold can increase to £500,000 per parent.

There is also an exemption that applies to a spouse, a civil partner or a charity, where there is no inheritance tax to pay if everything is left to you by your spouse.

It’s important to remember that gifts made during your lifetime could be subject to inheritance tax if you pass away within seven years of making the gift.

What are the individual and joint inheritance tax allowances?

For an individual, we mentioned the £325,000 Nil Rate Band. There’s an additional £175,000 if you leave property to direct descendants, so that’s £500,000 for one individual.

If you’re married or in a civil partnership and you leave everything to your civil partner or spouse, there is no inheritance tax to pay on first death. It’s all paid on second death.

So the joint estate will have the £325,000 Nil Rate band, plus £175,000 for the residence nil rate band (the additional allowance), plus you can transfer £325,000 of your spouse’s unused Nil Rate Band and another £175,000 unused Residence Nil Rate Band. So in total, a couple can leave £1 million tax free to direct descendants.

How do you avoid inheritance tax?

This is not tax evasion – this is a perfectly legal thing to do. As a previous chancellor said, ‘inheritance taxes are a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.’

It’s perfectly possible, but it’s more difficult these days because many people live in houses worth more than the inheritance tax thresholds. In the south east, around the M25 and London, a typical family property can be worth over £1 million.

But lots of things can be done – you really shouldn’t need to leave your beneficiaries having to pay a lot of inheritance tax if you plan early for it.

One way is using Trusts – placing assets in a Trust can help reduce the value of your estate, but the rules can be complex and you need advice. Of course, we provide advice on Wills that contain Trusts which often help.

Charitable donations won’t end up with your children or your bloodline, but leaving money to charity in your will would reduce or eliminate inheritance tax on that portion of your estate.

People who worry that their children won’t have enough money to pay the inheritance tax bill can consider taking out a life insurance policy to cover it. That might be relevant if you own properties that cannot easily be sold when you’ve died, and you want your heirs to have the money to deal with the properties and pay HMRC.

The simplest and most effective thing to do is spend the money – why not? That’s really the whole idea of savings, especially if you haven’t got children. Or, you can give away wealth as long as you survive for seven years. So enjoy your wealth, or gift it early, and you can reduce the size of your taxable estate.

How can people avoid inheritance tax on a property?

People typically ask whether it’s tax effective to give away the property you live in. I’ll talk about that a bit more in the following questions.

How do the rich avoid paying inheritance tax?

It can be through complex Trusts, set up overseas. This really requires very specialist, very expensive advice from solicitors. I’m talking about advice that costs tens of thousands of pounds. Of course, governments are trying to clamp down on that sort of avoidance.

Avoiding inheritance tax with a Trust, as I mentioned, can be done with simple Will planning – but it doesn’t always work within your generation. It would be saving inheritance tax for future generations. It’s about the inheritance you leave passing down to your children, grandchildren and great-grandchildren without them paying inheritance tax on their estates.

The other topical area is farmland. I have not come across an estate containing farmland so I can’t comment in detail, but with good planning you can leave the farmland to the children or grandchildren while you retain the property you live in. The normal allowances should be sufficient.

Can I buy my parents’ house to avoid inheritance tax? Can I give my house away to avoid inheritance tax?

Don’t do it. It usually ends in disaster. First of all, HMRC would deem this to be a gift with reservation of benefit or a GROB – not a very nice word.

It’s not effective in saving inheritance tax if you carry on living in the property. You might read that it would be effective if you pay your children a going rent – so you give the property to your children and then pay rent for living in the home.

That has other dangers. First of all, the children would have to pay income tax on the rent you’re giving them, so that’s not very tax efficient. And, if your children get divorced, you could find the home you’ve given them is part of their assets – and you could be kicked out.

You’ve given them the property to try and save inheritance tax, but in the end you lose it entirely. So that’s not a helpful suggestion, even if you do read it in the newspapers.

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How much can I give away to avoid inheritance tax? Can my executors donate to charity to avoid inheritance tax?

Any amount. Many people think they can only give away the ‘annual allowance’, which is £3,000 per person. But you can give away however much you like. As long as you survive seven years, it’s outside your estate.

The annual allowance of £3,000 per person is the amount you can give away even within seven years and not have it taxed.

Should I get married to avoid inheritance tax?

I have a few clients who have done exactly that. Actually, more clients have decided to go for a civil partnership than full blown marriage. And why not? It’s practical and in many cases it probably will save a lot of tax.

If you’ve been unmarried partners for many years, you may well have bought your own home together. It’s a problem if you want to allow your partner to carry on living in their home and save inheritance tax.

If your half of the home is worth more than £325,000 there’ll be inheritance tax to pay straight away. You may not have the savings for that, or you may not want to have that paid out of your savings. Getting married or arranging a civil partnership would mean you can transfer your share of the family home free of inheritance tax to your partner.

You get what’s called the spousal exemption, so there is no inheritance tax to pay until second death. That would then allow your children to claim not just the transferable nil rate band of £325,000, but also the transferable Residence Nil Rate Band, because they’re inheriting property from the second person to die.

You can potentially leave a £1 million worth of assets tax-free, instead of just £325,000.

Can I avoid inheritance tax with a self-invested personal pension (SIPP)?

Yes, these are really tax efficient vehicles. Don’t be put off by the changes in the Autumn 2024 budget, although if you’ve got a SIPP, and it’s risen to a significant value, you will need to get advice. Don’t get this yet, because the legislation relating to inheritance tax and SIPPs has not been passed yet [podcast recorded in March 2025].

But it can be a really useful vehicle to save inheritance tax. Advice on SIPPs should be taken from a qualified independent financial advisor (IFA). You can leave everything in a SIPP tax free to your spouse, even given the budget changes.

Your spouse can then give away the benefits to your children. If the spouse then lives seven years, it’s completely out of the estate. It needs planning, but in theory you can avoid quite a lot of inheritance tax with a SIPP.

Can inheritance tax be avoided with a limited company?

That’s outside of my expertise. Again, you need to find a very specific independent financial advisor or accountant for advice on that.

Does a joint bank account avoid inheritance tax?

No, it doesn’t. If you’re married and you’ve got a joint bank account, you inherit everything in that bank account by survivorship.

There would be no tax because of the spouses’ exemption. If you’re the child on your parents’ joint bank account and you’re left everything in a Will, you do inherit it by survivorship. But the assets belong to the person who died, so that would not avoid inheritance tax.

Just for clarification, people often add a son or a daughter to their bank account for practical reasons – to pay the bills after they’ve died or when they’ve lost capacity. But HMRC will not be fooled. They will know that those assets belonged to the person who added the son or daughter to their bank account – they’ll still be liable for inheritance tax.

Can I use equity release to avoid inheritance tax?

It’s worth considering as a tool to avoid inheritance tax if you are property rich and cash poor. We do have a lot of people like that in the UK.

The problem is that interest on an equity release mortgage is not paid during the lifetime of the mortgage holder – it compounds up and eats into the inheritance that the children or other beneficiaries receive.

You would have to be open-minded about it – it can be used to avoid inheritance tax, but equally, the loan can escalate quite quickly. It’s usually not a good idea for people in their 50s who’ve got a good life expectancy.

But in some cases it’s still worth considering. You may want to get your children onto the housing ladder and perhaps you couldn’t do it otherwise without downsizing. If you plan to leave £500,000 or a couple a million pounds to your children, to minimise the inheritance tax they pay it may still be worth letting the interest rate roll up on an equity release mortgage.

You really need to consider this carefully and certainly get advice from a qualified independent financial advisor.

Is there anything else we need to know about inheritance tax planning?

It’s such a big subject, inheritance tax. It’s worth listening to our podcast about estate planning, and then those about specific types of Trust Will that might suit your circumstance.

This is something that exercises people’s minds – they get angry about inheritance tax and worry about what their children and grandchildren might receive. It’s well worth spending time trying to get to grips with it.