Six ways to manage Inheritance Tax

Published: 15 June 2018

When the Chancellor triggered a review into the Inheritance Tax (IHT) system in January he was likely confident that it would be a popular move.

In his letter to the Office of Tax Simplification (OTS), Philip Hammond called for a review of the “particularly complex” IHT system, in search of proposals that would ensure it is “fit for purpose”1. The OTS - which acts as an independent adviser to the Treasury - said it would look at the “user experience” relating to IHT issues as well as the complexity of the rules2.

More Inheritance Tax is being paid

Currently, IHT is only paid after around one in every 20 deaths3 , but the government collected a record £4.9 billion in the 2016-17 tax year4, with a sharp recovery since the financial crisis reflecting a surge in the value of property and other assets.

Many of the baby boomer generation, retiring now, will have substantial property, pension and investments assets to pass on when they die, and their families may find the nil rate IHT band isn’t as generous as it once seemed.

As it stands, the nil rate band - above which IHT of 40% is charged on an estate - is £325,000. Where a family home is involved, a new (additional) nil rate band took effect last year. It's £125,000 for the 2018/19 tax year, and will increase the amount that can potentially be passed on free of IHT over the coming years. If you are married or in a civil partnership, any nil rate band that isn’t used by your estate can be added to your partner’s nil rate band when they die.

It’s a tax that can be managed

If you are concerned that IHT may be an issue for your estate, there are several ways of covering the IHT bill that your beneficiaries might face. There are also a number of options when it comes to mitigating potential IHT liabilities in advance, whether assets are being passed on to children, grandchildren or others.

Six practical ways

Here we outline six practical ways to manage IHT. Remember, IHT is a very complex area on which you may wish to seek professional advice. Tax rules can change and the tax you pay will depend on your personal circumstances.

1. Gifting

You can gift up to £3,000 a year of assets or cash (or a combination of the two) to a beneficiary without it incurring an IHT charge. It can also be carried forward from the previous tax year if it wasn’t used in that period. Small gifts up to £250 in a tax year to any number of people are completely free of IHT, provided they haven’t already benefited from the annual exemption. Gifts between spouses (including civil partners) are exempt from IHT.

2. Leaving money to charity

Gifts to UK-registered charities are also IHT-exempt (as are those to the main political parties and certain institutions, such as museums and universities).You can also reduce the charge on your remaining assets from 40% to 36% if you leave at least 10% of your total estate to a registered charity.

3. Using trusts

Assets placed inside some types of trust can remain outside your estate for IHT purposes. Trusts are often designed to allow children or other family members access to funds when they reach a certain age. There are different types of trusts with varying tax rules, so this is one area where it’s essential to get advice on what can be a complex subject.

4. Insurance

Writing life insurance policies in trust can also keep the proceeds outside of your estate, so they can be paid in full to your beneficiaries and be used to cover any IHT bill they might face. Again, this is a very complex area that’s best looked at with help from a professional adviser.

5. Your pension

Any money left in your pension pot when you die can be passed on as a lump sum or income to beneficiaries. In either case, other than in certain specific circumstances, the money is only taxable in the hands of your beneficiaries if you die after age 75. As this point it becomes subject to income tax at your beneficiary’s marginal rate. This means it can be particularly tax efficient to pass it to those who would otherwise have a low rate of tax, such as children, rather than those already paying tax at higher rates.

6. Tax-efficient investing

Although not suitable for everyone, certain higher-risk investments qualify for business property relief, making them exempt from IHT if they are held for two years or longer. These include qualifying shares in unquoted trading companies and shares in traded companies on the Alternative Investment Market. Enterprise Investment Schemes also benefit from IHT mitigation when held for two years or more, as well as capital gains and income tax benefits.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Laws and tax rules may change in the future without notice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.


1 gov.uk, Chancellor requests OTS review of Inheritance tax, 29 January 2018
2 Financial Times, Hammond calls for simpler inheritance tax, 2 February 2018
3 As above
4 CityAM, Inheritance tax reaches another record as £4.9bn receipts more than double in less than 20 years, 28 July 2017



Are your pension Expression of Wishes up-to-date?

Beneficiaries don’t usually pay inheritance tax on money from a pension pot because payment is usually discretionary. The pension provider chooses whether to pay it to them based on what you told them in your Expression of Wish form, making it vital to keep this up-to-date for all pensions you have.

Passing wealth to the next generation

Supporting yourself and passing wealth to the next generation is a balancing act for many approaching retirement today. What practical steps can you take to get that balance right?

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