Top tips to mitigate Inheritance Tax

Top tips to mitigate Inheritance Tax

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Gary Smith
Published: 22 Aug 2016 Updated: 13 Jun 2022

Careful estate planning of the Duke of Westminster meant that when he suddenly died last week, his £9 billion estate passed directly to his 25 year old son who will only have to pay a small share of Inheritance Tax (IHT). Rather than the £4 billion of tax duty (40% of the estate), the tax liability is 6% of the trust holdings (which is charged every ten years) because the late Duke kept the majority of his estate in a series of trusts set up in the 1950s. While campaigners are demanding a new ‘Duke of Westminster Tax’ to stop wealthy individuals from doing this in the future, more and more middle class families are finding themselves impacted by IHT due to rising asset prices.

  1. Pass on your pension

One of the conversations we often have with clients is that a pension can be used as a vehicle for IHT planning. The rules changed last year, making it easier to safeguard your pension for your heirs as pensions are not included as part of someone’s estate for IHT purposes. This means it can be passed on in its entirety without being subject to Inheritance Tax.

During your lifetime, by living from your ISAs, rather than touching your pension income, your pension can be passed on without incurring any IHT from next of kin. However, it is not always as straightforward as this – some pensions may not have been set up in a manner that allows this. As such, you should seek financial advice to ensure that your pension does – especially if you are planning to use this as a key foundation of IHT planning.

  1. Convert your portfolio in to AIM or EIS companies that qualify for Business Property Relief

Business Property Relief (BPR) can be one of the most effective planning tools as it reduces the value of transferred assets liable to IHT by either 50% or 100%. BPR includes the transfer of shares in an unquoted company, including AIM or EIS, which allows for the full 100% relief on IHT. You can claim the relief, which can be passed on while the owner is still alive or as part of a Will, by simply filling in a government form.

As with many of these rules, there are requirements – the assets must have been owned for two years before qualifying for BPR and must remain in these structures or else all relief will be lost. AIM and EIS investments carry higher risk too, however it does allow for a hugely liberal relief on the qualifying assets. There are a number of finer details and intricacies to this relief and it can be rather technical, so we would advise anyone using this as their main plan for IHT to speak to a financial planner to ensure all points are covered.

  1. Give assets away seven years before you die

Many people leave instructions on the distribution of their assets in their Will, when these will potentially form part of their estate for IHT purposes. Others begin gifting when they are very elderly or infirm – but gifts count towards the value of your estate for seven years. There are numerous options to begin distributing your wealth to those around you that you care most about, as long as you start early, and of course ensure you leave enough for yourself to live on!

There’s no tax on gifts that you would give from your normal income, such as Christmas and birthday presents which are ‘exempted’. Those that have a larger value, such as a property or a large amount of money are only ‘potentially exempt’ - although they have to be a full gift and you can’t still benefit from it, such as continue to live in the house that you have gifted, if so this is a gift with reservation and would be liable for IHT. This means if you give a large gift but die within seven years, then the gift is taxable. The full 40% tax applies if you die up to three years later, but reduces on a sliding scale known as ‘taper relief’ if you die three to seven years later.

  1. Leave it to charity

One of the longstanding planning options is that if you leave at least 10% of your estate to charity, the amount of IHT you must pay falls from 40% to 36%. This can mean your loved ones will actually still receive 90% of your assets (minus Inheritance Tax), but benefit from a huge saving on the amount of tax paid.

  1. Insure liabilities

Historically, one of the most commonly used vehicles for mitigating an IHT liability was the whole-of-life insurance policy. This is an insurance policy written in trust, meaning that the resulting income from the policy remains outside your estate and therefore not subject to IHT.

Whole-of-life policies differ from many others as they never run out, whereas many of their counterparts are limited to a set time-frame. As the policy does not have an end date, they are generally more expensive than other policies with higher premiums. But as long as you continue to pay the premiums, the pay-out when you die is guaranteed.

Of course these ideas may not allow your next of kin to live like a duke, but if you begin planning early enough and factor your wealth effectively, they could help your relations to look after all death duties in a more comfortable manner.

If you are looking for other ways to manage your estate why not download our guide to estate planning and Inheritance tax:

Or if you would like further information on how we can help you, your first consultation with our financial planners is free and we’re based around the country:


This article was previously published on Tilney prior to the launch of Evelyn Partners.