An inheritance tax bill is becoming a threat for more and more families amid soaring house prices and the frozen inheritance tax threshold.

While most people won’t be affected by the tax, inheritance tax receipts have been increasing year-on-year – with HMRC collecting more than £7billion in the tax in 2022/23.

While it’s important people seek independent professional advice for their specific circumstances, here are some tips:


Be aware of the inheritance tax threshold

The standard inheritance tax threshold is £325,000, and any assets above this threshold are subject to charge – this includes any property, possessions or money.

IHT can be charged up to 40 per cent on an estate above a tax-free threshold of £325,000, for some people this can be a significant blow to their financial legacy.

Whilst the additional residence nil rate band of £175,000 was introduced in 2017, this only applies where the family home (also known as the principle private residence) is passed to lineal descendants so it's not available to everyone. There are also conditions as to how the property can be passed when via trusts that need to be carefully managed.

Rising property prices and the freeze on inheritance tax thresholds until 2027/28 means more families are getting caught in the IHT net than would have if the bands rose with inflation.

Therefore it really important for families to understand how they could plan to avoid the threshold and the eventuality of IHT.


Writing a will

Writing a will is a vital part of inheritance tax planning. If someone dies without a will, assets will be shared out by legal default, and could be subject to IHT, that with a will could have been avoided.

By making any wishes clear in will clients can plan to allocate their estate in a way which will reduce IHT and maximise the benefit of assets to those they are leaving them to.


Consider gifts

People may be able to reduce a potential inheritance tax bill by giving gifts during their lifetime.

Taking advantage of gifting rules could potentially reduce an inheritance tax bill by transferring wealth outside of the taxable estate.

Gifting from surplus income is permitted, and people can gift £250 to as many people as they want via the Small Gifts Allowance, provided they've not used another allowance on the same person.

There is also an annual exemption of £3,000 a year, which can go to either one person or be split among several people.

Tactical treats to loved ones in the form of any of such gifts could reduce an inheritance tax bill or even put you under the taxable threshold.

Charitable gift

Give to charity

Including a charitable donation in will could also slash an inheritance tax liability as it will be free from tax.

In addition, if more than 10 per cent of your taxable estate (10 per cent of the excess over £325,000) is left to charity in a will, the inheritance tax rate for the rest of the estate will fall from 40 per cent to 36 per cent.


Giving to the spouse

People who are married or in a civil partnership can benefit from inheritance tax rules.

If the client is married, 100 per cent of assets gifted between spouses are IHT-free and don't use any of the nil rate bands.

So, if a client leaves their entire estate to their spouse in a will, there will be no inheritance tax due and the inheritance will take nothing from the tax-free allowance. If a spouse dies and their tax-free allowance of £325,000 has not been used up from gifts to others in their will, then their remaining tax-free allowance can be transferred to the surviving spouse; potentially doubling their allowance so they can pass on up to £650,000 tax-free when they die.


Give a wedding gift

There is also a wedding gift allowance within inheritance tax rules.

There’s a special exemption from IHT for cash gifts made on or shortly before the date of a wedding (‘gifts in consideration of marriage’). The tax relief on IHT depends on the relationship between the gifter and the giftee:

Each parent (including step-parents) can gift up to £5,000 tax-free.

Grandparents and great-grandparents can gift up to £2,500.

Any other person can gift up to £1,000.”


Also remember the seven-year rule - if a person gives away a gift more than seven years before their death, then it won’t be subject to inheritance tax. If the person dies within seven years of a gift’s time then IHT may be due, with the help of taper relief.

Gifting can sometimes be tricky; gift too early and you could lose the asset and/or income and control, gift too late and you could pay 40 per cent IHT due to the seven-year rule.


Passing on a pension

Pensions usually fall outside of the estate, so are exempt from IHT. You can spend the assets within an estate in retirement instead of a pension, allowing it to be passed on IHT-free; unless there is reliance on the state pension, which cannot be inherited.

For example, spending any assets could consist of downsizing or selling a house to rent, using the surplus as a retirement fund instead of a pension; spend the house, save the pension


Trust planning

Another option people may consider is putting assets in a trust.

Gifting into trust can be a clever way of removing assets from an estate for inheritance tax purposes. Setting up the right trust can sometimes be complex and so it’s important to ensure the right advice is given according to the clients wishes – just contact the BTWC team for advice and support on the right trust.

For example, bare trusts are set up for if the client knows exactly who they are gifting to. If the client lives for seven years after gifting to this type of trust, the gift will be inheritance tax-free; this is known as a potentially exempt transfer (PET).

However, if the person dies within seven years of making a gift into a bare trust, inheritance tax could be due.

Discretionary trusts exist for gifting not to a specific person but to a class of people, such as grandchildren. If the client lives for seven years after gifting to this type of trust, the gift will also be inheritance tax-free.

Discretionary trusts can offer more flexibility than bare trusts but at a cost, as all transfers in will be assessed for IHT on entry, periodically, and on exit. On entry, if the gift exceeds the nil rate band of £325,000 there will be an instant charge on 20 per cent of the balance. Gifts into this type of trust are known as a chargeable lifetime transfer (CLT).


Plan ahead

Finally, in your discussions with clients, recommend they plan ahead! Inheritance tax planning is complex and can vary from client to client. The ore a client can plan ahead, the more of their wishes can be considered and plans put in place.


For any advice in IHT planning and the options available just contact the BTWC team, we’ve worked across numerous scenarios and have in depth knowledge on the best route to consider to support a clients need. We work with Chartered Tax Advisers to ensure that you have access to the best advice and guidance available.