Financial planning

How to save Inheritance Tax

Shona Lowe

Common myths surrounding Inheritance Tax (IHT) often mean that loved ones can end up paying too much when it comes to an IHT bill. And with tax receipts showing that a record £5.2 billion was collected from people’s estates last year, and £5.4 billion expected this tax year, it really is crucial to consider how you are going to make sure you don’t add more than you need to those numbers.


With careful planning, it is possible to reduce or even remove liability altogether.

To help get the ball rolling on your IHT planning, here is a breakdown of the common misconceptions:

Myth 1 – ‘My estate isn’t that large – I won’t be affected by IHT’

This may or may not be true but it depends on the value of your estate and many people underestimate that. There is a tax-free inheritance tax allowance of £325,000 (known as the nil-band-rate). This means you can generally pass on anything up to this amount without paying IHT. So if your estate, including all property, possessions and money, is worth less than this amount then your beneficiaries shouldn’t have to pay IHT.

However, the combination of a nil-band rate which has been frozen since the 2009-10 tax year and house prices at an all-time high in the UK means that more people than ever who wouldn’t consider themselves to be wealthy are being caught in the IHT net. And certain areas are affected more than others. For example, according to the UK House Price Index for last year, the average house in the South East sits at just below the IHT threshold at £320,168 and the average house price in London sits way beyond the threshold at £481,556.

Inheritance tax is chargeable at 40% on anything over the £325,000 threshold, or over up to £450,000 (increasing to up to £500,000 by tax year 2020-21) if you’re leaving your home to a family member thanks to the introduction of the new ‘main residence nil rate band’.

So it’s worthwhile working out what your estate is worth.   If it’s over £325,000 (or £650,000 if you’re married or in a civil partnership), seek advice to find out whether you could benefit from the residence nil rate band and what other planning opportunities are available to you. 

Myth 2: ‘I’ll just give away my wealth so I don’t have to pay’

Not quite – unfortunately you can’t simply give away all your wealth shortly before you die and escape IHT. Gifts generally take 7 years to completely leave your estate for tax purposes.

However, there are ways of gifting money to loved ones tax free. These include;

  • Making gifts of up to £3,000 per tax year (known as your annual exemption) to whomever you like. And if you didn’t use this in the previous year, you can carry that forward to give you an exemption of £6,000.
  • Wedding gifts – a parent can gift £5,000 to a child when they get married, a grandparent can gift £2,500.
  • An allowance of £250 for small gifts to as many people as you like.
  • There are also some other scenarios in which you can gift money free of IHT – such as to charities and political parties.

Myth 3: ‘I’m married so IHT won’t affect me’

Many couples assume that they don’t need to worry about IHT. But they may be wrong.  First, if you are not married you do not get any kind of special exemption on money left to your partner, so if your estate is worth more than £325,000, there will be a bill.

And even if you are married or in a civil partnership, without a valid will IHT may still come into play.

For example, if a person dies leaving behind a spouse and children, the rules of intestacy could mean a portion of the estate automatically goes to the children, thus triggering an IHT charge that could have been avoided if the entire estate had passed through a Will to the spouse.  However, it’s important to think beyond what happens when there’s a surviving spouse/partner to leave everything to in your Will.  If the combined estate value lands with the surviving spouse, they could find they are in the IHT bracket.  Whilst that surviving spouse can do their own IHT planning, it can sometimes make sense to include other beneficiaries and trusts in Wills to make sure the surviving spouse/partner doesn’t inherit more than they need.

For these reasons, it really is important to ensure you have a valid and up-to-date will. It gives you a say in who inherits from you, allows you to take steps to protect your assets if you have vulnerable or young beneficiaries, and can give you the peace of mind knowing that you’ve done all you can to leave as much as possible to the people (or causes) that are important to you.

If you don’t have a will or would like to update yours, you can contact our 1825 tax, trust and estate planning experts:

Call charges will vary. We’re open Monday-Friday 9am-5pm.

Hopefully this has dispelled some of the myths surrounding inheritance tax; however, IHT planning can be a complex field to navigate. Arrange your free consultation today or speak to your 1825 Financial Planner if you have any questions.


The information in this blog should not be regarded as financial advice. Laws and tax rules may change in the future. The information here is based on our understanding in June 2018. Your personal circumstances also have an impact on tax treatment.