5 ideas to save on Inheritance Tax

This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Smith & Pinching in Norwich, Lowestoft and Eaton. The Financial Conduct Authority does not regulate taxation advice, estate planning or inheritance tax planning.

What kind of legacy do you hope to leave to your loved ones? Without careful planning, inheritance tax (IHT) has great potential to undermine your long-term goals. Fortunately, there is a range of strategies available to mitigate needless tax on your estate.

Below, we offer five ideas to inspire your own bespoke IHT plan. If you want to discuss your strategy with us, please get in touch to arrange a meeting with a financial adviser.

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#1 The Nil Rate Band (NRB)

In 2023-24, IHT is typically levied on an estate (after the owner’s death) once its total value exceeds £325,000. The standard tax rate is 40%. For instance, if an individual dies leaving a £500,000 estate, then £175,000 may be subject to IHT – leading to a £70,000 bill.

One way to avoid IHT, of course, is to keep your wealth under the IHT threshold. However, that may not leave the inheritance value that you and your beneficiaries hope for. Therefore, you might explore other ideas to “extend” your IHT-free allowance.

For instance, the Residence Nil Rate Band (RNRB) lets an individual pass down an extra £175,000 to “direct descendants” if the estate includes the family home. In the first example above, therefore, the estate owner could pass down his £500,000 estate without IHT if he left his main residence to his children (and the property was worth at least £175,000).


#2 Marriage & civil partnership

Here, we are not arguing that people should get married just to save on IHT. However, financial considerations can play a part in some unmarried couples’ decisions to tie the knot. For instance, married couples and civil partners can leave any unused IHT allowance to their surviving partner. Unmarried couples cannot do this, even if they have had children together and/or cohabited for a long time.

In 2023-24, this means that a married couple could, conceivably, leave a £1m estate to their direct descendants without facing IHT. Suppose a husband dies and his full (unused) £325,000 IHT-free allowance is passed to his surviving wife, combining with her own £325,000 allowance. This equates to £650,000. In addition, his unused £175,000 RNRB passes to her and combines with her own. Altogether, this leads to a total IHT-free allowance of £1m provided the wife leaves the family home (minimum value of £350,000) to her direct descendants when she dies.


#3 Gifts

Each tax year, an individual can give away up to £3,000 in gifts without these being regarded as part of the estate by HMRC (for IHT purposes). This is called the Annual Exemption and it can be a powerful way to reduce your future IHT liability whilst you are still alive. Another nice benefit is that you get to see the joy and difference your gift brings to your loved one(s).


#4 Investing in pensions

A pension is an investment. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

Did you know that funds held in a pension “pot” (a defined contribution pension) can be passed down to beneficiaries, upon death, without IHT in 2023-24?

This little-known rule means that pensions are not only very useful for retirement planning, but also for estate planning. Working with a financial adviser can be very helpful when organising your portfolio (e.g. shares) to optimise your estate plan. For instance, investments held outside of a pension are not usually exempt from IHT. Therefore, moving some of these shares into your pension, upon taking professional advice, could help to reduce your future IHT bill.

Be careful to consult expert advice first, as large-scale restructuring of your asset base can have knock-on effects on your wider financial plan and involves navigating some complex rules. In particular, be mindful of the Annual Allowance on pensions which restricts how much you can contribute to your pension(s) in a given tax year without being subject to a tax charge.


#5 Use life insurance

If you cannot realistically avoid a future IHT bill, then it can sometimes make more financial sense to take out a life insurance policy which pays out to cover the bill when you die. Here, you need to write the policy into an appropriate trust (or the lump sum itself may be regarded as part of your estate!). Also, seek financial advice about how the future IHT bill might compare to the total value of the life insurance premiums you expect to pay.

If the latter is likely to exceed the former, then it may be more sensible to simply pay the future IHT bill using liquid assets from your estate (e.g. cash savings). However, if the premiums will plausibly be smaller than the future IHT bill, then it may be a good idea to find a suitable policy which fits your needs. Again, speak with a financial adviser to explore the full range of financial protection options in the marketplace – helping you to find the best deal.



If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a meeting with a financial adviser.

01603 789966
[email protected]