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Record Sum of Inheritance Tax Collected – What can you do to Mitigate Risk?

Gresham Wealth

According to the latest figures, Her Majesty’s Revenue and Customs (HMRC) collected £4.7 billion in inheritance tax in the last financial year, a record sum since the introduction of the current system. Further research by Tax Action suggests that some £595 million will be unnecessarily collected in Inheritance Tax in the current financial year as a result of lack of effective Inheritance Tax planning.

Under current legislation, individuals can leave up to £325,000 of wealth to their loved ones without incurring any tax. Anything above that amount is taxed at 40 per cent. The IHT threshold is double the amount for married couples, who between them can pass on up to £650,000 to their beneficiaries before incurring any tax.

Although this may seem like a significant enough sum, under the law as it stands currently, the calculation of an estate for Inheritance Tax purposes includes cash savings, investments, any properties owned, car, jewellery and other valuables, minus any liabilities, such as an outstanding mortgage.

Whilst avoiding Inheritance Tax altogether may not always be an option, the above figures indicate that individuals / couples are not necessarily taking the steps they could to minimise the tax bill payable on their death, and therefore maximising the amount to be passed on to the next generation.

So what do you need to know and what can be done to mitigate the risk of incurring a significant IHT bill upon your death?

Main residence changes

Although there are no planned increases to the main threshold for Inheritance Tax, as of April 2017, an additional allowance of £100,000 per person will be introduced on the net value of a family home or main residence. The plan is that this allowance will increase each year thereafter until 2020 – to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21. In theory therefore, a married couple will have an overall allowance applicable to their main residence of up to £1 million by the start of the financial year in 2020.

Funds that fall outside of estates

Since the 55% death tax was scrapped in as part of ‘pension freedom’ reforms, beneficiaries of inheritance via a pension stand to be much better off. Now, if a pension holder dies before the age of 75, they can pass their pension pot on to direct decedents without any tax implications.

If over the age of 75 upon death, withdrawals from the inherited pension are taxed at the recipient’s relevant income tax rate.

These changes make pensions by far one of the most tax efficient ways to cascade wealth.

Gifting assets

Cash flow planning to establish whether making lifetime gifts to loved ones is affordable should also be considered.

Provided there is no reservation of benefit by the donor, assets can be gifted outright to anyone of your choosing and provided you survive a seven year period, the gift will fall out of your estate for Inheritance Tax purposes. This helps in two ways; the value of the gift leaves the estate within seven years of making it and any future growth on the assets gifted is immediately out of the estate from the date the gift was made.

Making outrights gifts is probably one of the most cost effective ways of addressing your Inheritance Tax liability.

Given the above it may seem like this strategy is too good to be true. However, this approach does not come without its pitfalls. Quite rightly clients are often reluctant to make outright gifts as they do not want to lose control of the asset in question. This may be because they are uncertain whether they will need income from it or because they are concerned about the circumstances surrounding the gift. Sadly, the prospect of divorce is often a worry as are concerns surrounding how the gift will be used or spent!

In these scenarios trusts may provide the ability to help address Inheritance Tax whilst also accounting for other non-financial concerns as they allow clients to retain some control (but not benefit) from the assets.

Start planning early

The earlier you start to make plans for your estate, the easier it will be to take the action required. As described above, there are a number of tactics that can be employed to start to pass wealth on to the next generation, however these need to be done within certain time limits to avoid tax liability. The later you leave IHT planning, the greater the risk that you might pass away before having had chance to put sufficient strategies in place.


As with any aspect of financial planning, Inheritance Tax planning needs to be considered alongside the other things you want to achieve with your wealth, as well as additional factors such as your lifestyle and living arrangements. For these reasons, Inheritance Tax planning can be particularly complex and as such, specialist advice from an independent financial adviser should be sought if your estate is close to, or falls over the current threshold levels.

For advice tailored to your individual circumstances, please contact us to arrange to speak to one of our chartered financial advisers.

The Financial Conduct Authority does not regulate Inheritance Tax or estate planning.

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