Top tips to mitigate IHT

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Julia Grimes
Published: 18 Aug 2016 Updated: 28 Jan 2017

Careful estate planning by the Duke of Westminster meant that when he suddenly died last week his £9billion estate, which passed directly to his 25 year old son, will only be subject to a small share of inheritance tax (IHT). Rather than the £4billion of tax duty (40% of the estate), the tax liability is 6% of the trust holdings which is charged every ten years all due to the late Duke keeping the majority of estate in a series of trusts which were 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. Even if your estate does not amount to billions of pounds there are a variety of ways to mitigate IHT. Gary Smith, Financial Planner at Tilney, outlines his top tips on careful IHT planning.

1. Pass on your pension

One of the conversations I keep on having with clients, is to re-educate them that a pension is to be used as a vehicle for IHT planning as it can be passed to your next of kin in your estate. The rules changed last year which has made 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 tax. During your lifetime, by living from your ISAs, rather than touching your pension income, means that the pension can be passed on without incurring any tax from next of kin. However, it is not quite as straight forward as this as some pensions may not have been set up in a manner that this is allowed, as such you should seek financial advice to ensure that your pension allows for this, especially if you are planning to use this as a key foundation of IHT planning.

2. 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 either by 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 get the relief, which can be passed on while the owner is still alive or as part of the will, by simply filling in a government form.

As with many of these rules, there are requirements – the assets must have been owned by the transferor for two years before a transfer to become part of BPR can be made 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 I would advise anyone using this as their main plan for IHT to speak to a financial planner to ensure all points are covered and no loopholes missed.

3. 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’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. If you do decide to give a large gift, but die within seven years then the gift is taxable with the full 40% tax. If you die up to three years later, then on a sliding scale, ‘taper relief’ is applied between three to seven years after giving the gift.

Although there are instances which may cause you to pay tax on a gift, there are still means by which you can assist in distributing your wealth. Each tax year you can give money to your children, grandchildren or relative; assist with the payment of a dependent person’s living costs; or give money to charities and political parties. There are numerous options to begin distributing your wealth to those around you that you care most about, as long as you do so from an early date, and of course ensure you leave enough for yourself to live on!

4. Leave it to charity

One of the longstanding loopholes of planning is that if you leave 10% of your estate to charity, the amount of IHT you have to pay falls from 40% to 36%. This can mean you’re your loved ones will actually still receive 90% of your assets, but benefit from a huge saving on the amount of tax paid.

5. 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 form 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 counter parts are limited to a set time-frame. As the policy does not have an end-date, they are generally more expensive than others with the premiums also higher, but as long as you continue to pay the policy 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, it could allow for relations to look after all death duties in a more comfortable manner.

To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/


Important information:

The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. This press release does not constitute personal advice. Past performance is not a guide to future performance.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.

If you are unsure of your options you should seek professional financial advice or visit


This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.