Your Family Could Lose 40% of Their Inheritance – Here’s How to Prevent It
Inheritance Tax (IHT) is one of the most avoidable taxes, yet many families fail to plan ahead as they unintentionally hand over hundreds of thousands of pounds to HMRC because they didn’t understand the rules or take action early enough.
Here’s how to change that and keep more of your wealth in the family – not the taxman’s pocket.
1. Make Full Use of the £1 Million IHT Allowance
Here’s how it works:
- Every individual has a £325,000 Nil-Rate Band (NRB) – that’s tax-free.
- If you leave your main residence to your children or grandchildren, you also qualify for an additional £175,000 Residence Nil-Rate Band (RNRB).
- For married couples or civil partners, this means you can combine allowances up to £1 million can potentially pass to your heirs tax-free.
✅ Action Tip:
Review your will and ensure your estate is structured to fully utilise both the NRB and RNRB. If your estate is worth more than £2 million, you may begin to lose the RNRB – so planning becomes even more critical.
2. Use Gifting to Reduce the Value of Your Estate
Gifting is a powerful, often underused tool. It’s also the easiest way to start reducing your estate value.
Here’s what you can give tax-free:
- £3,000 per year (annual exemption).
- Small gifts of up to £250 per person (as long as the recipient hasn’t received another exempt gift).
- Wedding gifts: £5,000 to children, £2,500 to grandchildren.
- Unlimited gifts that survive 7 years are free from IHT.
But beware: gifts made within 7 years of death may be subject to “taper relief,” and some rules apply around regular gifts from income.
✅ Action Tip:
Start gifting now. Create a plan to make regular, manageable gifts especially to children or grandchildren – and track them properly.
3. Give from Surplus Income (and Keep Records!)
If you have income that exceeds your needs, you can make regular gifts from income that are immediately exempt from IHT – no 7-year rule!
This is a hugely effective yet often overlooked strategy. The key is that the gift must be:
- Regular (e.g. monthly, quarterly)
- Made from income (not capital)
- Not impact your standard of living
✅ Action Tip:
Work with an accountant to document these gifts. HMRC may request proof, so keeping detailed records is essential.
4. Use Trusts to Take Control While Reducing IHT
Trusts allow you to move assets out of your estate while still retaining a degree of control, particularly useful for high-value estates or complex family arrangements.
Some common options:
- Bare Trusts: Simple, effective for younger beneficiaries.
- Discretionary Trusts: Offer flexibility on who receives what and when.
- Loan Trusts or Discounted Gift Trusts: Can provide access to income while reducing IHT.
Setting up a trust can also help protect assets from future divorce, bankruptcy, or mismanagement.
⚠️ Caution:
Trusts come with their own tax rules – you’ll want professional advice to get it right.
5. Life Insurance Can Cover the Tax Bill
You can’t avoid all IHT, but you can plan for it. A life insurance policy written in trust can cover the IHT liability your estate may face giving your heirs the funds to pay the tax without selling assets.
✅ Action Tip:
Ask your financial adviser or accountant about taking out a “whole of life” policy and putting it in trust. It’s a smart way to ease the financial burden on your family.
6. Invest in IHT-Exempt Assets
Certain investments are IHT-efficient, such as:
- Business Relief (BR) qualifying investments (like shares in unlisted trading companies)
- AIM-listed shares – can become IHT-free after 2 years if held at death
- Enterprise Investment Schemes (EIS) and Seed EIS also offer generous IHT benefits
These can reduce or eliminate IHT on qualifying investments – but carry risk and require good advice.
✅ Action Tip:
If you’re entrepreneurial or open to higher-risk investing, explore IHT-relief investment options with a financial adviser.
7. Update Your Will and Use a Deed of Variation
Having an up-to-date will ensures your estate is distributed efficiently. In some cases, heirs can redirect their inheritance using a Deed of Variation, which can help reduce the IHT burden – even after death.
✅ Action Tip:
Review your will regularly – especially after major life changes (e.g. marriage, divorce, children, inheritance). Don’t leave it to chance.
8. Charitable Giving Can Cut Your IHT Rate
Leave at least 10% of your net estate to charity, and the IHT rate on the remainder of your estate falls from 40% to 36%.
That’s a win-win: you support causes you care about and reduce the tax burden.
✅ Action Tip:
Consider leaving a portion of your estate to charity. It’s generous and tax-smart.
Final Thoughts: Take Control Before It’s Too Late
Inheritance Tax is not just a tax on the rich. With property prices rising, many families are finding themselves caught out and unprepared.
But with the right planning, it’s completely possible to protect your wealth, support your family, and reduce (or even eliminate) your IHT liability.