Can I reduce my family’s inheritance tax bill?

By Sarah Tallentire, Financial Planning Consultant, Armstrong Watson, Penrith

Of all the different taxes levied in the UK, inheritance tax is one of the most peculiar.

The IHT is often described as the UK’s most hated tax. Former Chancellor Lord Jenkins once called inheritance tax “a voluntary levy paid by those who distrust their heirs more than they love the taxman”.

However, the amount of tax it generates for the Exchequer is small: it represents about 1% of the total generated by the three main taxes: income tax, national insurance and VAT.

The vast majority of estates pay no inheritance tax. For married couples and civil partners who are landlords with children, inheritance tax is generally not an issue as long as their estate does not exceed £1million.

HMRC statistics show that in 2019/20 only 3.76% of estates suffered the tax. In practice, almost half of inheritances will escape inheritance tax simply because there is generally no tax on transfers between married couples and civil partners. However, this exemption does not apply to unmarried couples because, with inheritance tax, the notion of de facto spouse does not exist and the number of inheritances now liable is increasing.

Why do more families have to pay inheritance tax?

New figures from HMRC show that in 2021/22 inheritance tax revenue rose by almost 14%, the average inheritance tax bill faced by this small minority of valued taxpayers. just over £250,000. One of the reasons for the increase is the fact that the zero rate band is frozen.

Currently, everyone benefits from a £325,000 inheritance tax relief, known as the Nil-Rate Band. The standard rate of inheritance tax is 40% of your estate over the £325,000 threshold.

The freeze started in 2009 and its duration has been regularly extended – the “thaw” is now only expected in April 2026, i.e. 17 years! With inflation soaring, more than three years of freezes will result in more estates falling into the inheritance tax net.

What can I do to protect myself against any inheritance tax bills?

If you are concerned about inheritance tax, there are several ways to reduce its impact on what your children or grandchildren will inherit.

You won’t be surprised to learn that with such a misunderstood tax, the starting point is professional advice.

A good independent financial adviser will often work in conjunction with a lawyer. They will ensure that a client’s estate planning is properly established, based on their wishes and goals, and regularly reviewed, especially as the law may change.

For the majority of people, there are various approaches that can be taken to mitigate a future estate tax.

Of course, you can choose to ignore it. If there are taxes to pay for your family later, so be it. On the other hand, you could choose to spend enough money during your lifetime that there is little or nothing left in your estate. However, this approach may be easier said than done!

If any of these approaches are not right for you, there are other steps to consider and we discuss these in Our Guide to Inheritance Tax and Estate Planning which can be downloaded from our website. –

At Armstrong Watson, our quest is to help our customers achieve prosperity, a secure future and peace of mind. We provide bespoke tax planning, financial planning and wealth management all under one roof. Please note that advice on inheritance tax matters can be provided by a mix of our financial planning and tax specialists.

Sarah Talentire

For further information please contact Sarah Tallentire on 01768 222042 or email [email protected]

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