The Coronavirus situation has made my husband and I think about our own mortality – we’ve both been in the high-risk category because of his heart condition and my asthma. We’re both in our sixties and still employed: we are both higher rate taxpayers. We’ve counted up our assets, excluding our pensions, and they are already worth about £1.5 million, so we are already anticipating an Inheritance Tax bill when we die. Our son says we should start giving him money every year to cut the size of our estate but I’m not sure we’re ready to do that yet – we have some big plans for our retirement. What else can we do to reduce our Inheritance Tax bill?

Carl Lamb of Smith & Pinching Responds
There is a lot that you can do to reduce your potential future Inheritance Tax (IHT) liability. Gifts are certainly a way to reduce the size of your estate and there is a range of gift allowances that can be used to ensure that you manage gifts in an IHT-efficient way. However, I can appreciate that you are reluctant to give too much away at this stage when you will hopefully have a long and active retirement ahead of you.

There are investment solutions that can help manage a future IHT liability. These include Discounted Gift Trusts which remove sums from your estate but still allow you to use your wealth to generate an income.

As you are still building your pension savings, you might also consider making additional contributions to your pension schemes – or you could start personal pensions if you only have workplace schemes and these don’t accept additional contributions. Under pension rules, you can personally make tax-efficient contributions each year of the lower of ‘100 per cent of your earnings’ or ‘£40,000 less any employer contributions and plus any available carry forward’ (provided you haven’t already started taking flexible benefits from your funds). The contributions attract tax relief, which will be particularly attractive to you both as you are higher rate taxpayers. Any pension benefits available to your heirs on your death will normally be considered outside your estate for IHT purposes.

I strongly recommend that you talk your situation through with an independent financial adviser to build a financial plan that gives you the flexibility you need throughout your retirement but manages your future IHT liabilities. Most advisers will use lifetime cashflow modelling to allow you to project the size of your estate under different scenarios: this can be really useful to enable you to understand the effect of either giving away or retaining assets at different stages of retirement.


Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.