10 ways to protect your estate for your loved ones and reduce your IHT bill

 30 March 2021
10 ways to protect your estate for your loved ones and reduce your IHT bill

When your loved ones come to inherit your estate, the very last thing you’ll want to leave them is a massive IHT bill. Even if you consider your wealth levels in retirement to be modest, you may still need to take action to minimise Inheritance Tax. This is particularly if you own property, and have a portfolio savings and investments. 


What is Inheritance Tax?

Inheritance Tax is payable in the UK on death on the total value of your estate, and sometimes when you give away certain assets during your lifetime. Currently, there is no IHT due on estates valued up to £325,000 (the nil-rate band) for the 2020/21 tax year). If your estate is worth more than £325,000, your estate will pay IHT on the value of the estate over that limit at the current rate of 40% to HM Revenue & Customs (HMRC). So don’t let the taxman ‘inherit’ your estate, and act to secure your hard-earned estate for those you want to benefit most.


10 tips to pay less or avoid Inheritance Tax

Here are our top ten tips to help you pass on more to your family and those you love and less into the HMRC coffers. Some of these strategies will require advice from a qualified financial adviser. We are able to work with your current adviser or we can introduce you to our sister company Panthera Wealth to maximise your planning options.


1. Transfers during your lifetime

One way to pass on wealth free from Inheritance Tax is to gift/transfer it to one or more beneficiary more than seven years before your death. Of course, there is a degree of unpredictability in the outcome, but it also enables you to help out the family whilst you are alive. If you die within seven years of making the gift, Inheritance Tax may be charged, though the rate will be reduced if more than three years have passed.


2. Personal gifts

Gifts up to a certain value can be made free from Inheritance Tax, even in the last years of your life. Your annual allowance includes: 

  •  Large gifts with a total of no more than £3,000

  • Unlimited small gifts up to a total of £250

  • Wedding gifts of up to £5,000 for your children, £2,500 for your grandchildren, or £1,000 for others

Gifts made within your regular pattern of income and normal expenditure (for example, quarterly payments towards a grandchild’s school fees from your annual income) can usually be made free from Inheritance Tax. To make sure HMRC understand what you have done, you may need to document this pattern for three or more years.


3. Charitable gifts

Gifts to registered charities in your will can be made entirely free from Inheritance Tax. Furthermore, donations to your favourite charities can help you to reduce the size of your estate to within the Inheritance Tax threshold.

Additionally, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax payable on your remaining estate (above the nil-rate band) from 40% to 36%.


4. Life Insurance

You take out a life insurance policy written in an appropriate Trust that can provide a lump sum on your death. This should be used to pay the resulting Inheritance Tax bill. If this policy is within a Trust, the lump sum paid out on your death will not count towards your estate. Insurance can also be taken out when making large financial gifts to cover the Inheritance Tax bill if you were to die within the following seven years. This is known as a ‘term assurance’ policy.


5. Pensions

Thanks to changes in the way that pensions are taxed, more of your fund can survive your death. It can then provide an income or nest egg for your loved ones to enjoy, long after you are gone.

Typically, though with some exceptions, pensions are excluded from the calculation of your estate, and can be passed on free from Inheritance Tax. However, not every pension scheme allows pensions to be passed on, so you need to check the conditions of your scheme. If it is allowed, it is important to name a beneficiary to whom you wish to pass on your pension benefits. 

You can make payments in your lifetime into another person’s pension, which will protect this money from Inheritance Tax. For example, you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £2,880 a year. However, they will not usually have access to this money until they reach age 55.

Passing on pensions is a complex area, and you do need to seek professional advice. Panthera Estate Planning does not provide regulated financial advice. If you wish to discuss your situation and pension, we can introduce you to our sister company Panthera Wealth


6. Discretionary trusts

A discretionary trust can help you to reduce your Inheritance Tax liability by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to pay in up to £325,000, which will be excluded from your estate after seven years. Funds above the nil-rate band may attract a lifetime tax charge.


7. Loan trusts

If you would like to protect your money in a trust but need to know you can withdraw it if you need it, it’s possible to loan money to a trust. You will always have the option to withdraw the original capital you loaned, but any growth on that capital will be protected within the trust from Inheritance Tax.


8. Discounted gift trusts

If you would like to earmark some wealth to be passed to a beneficiary or beneficiaries on your death, but want any income generated paid to you in your lifetime, you can use a discounted gift trust. This will exclude the contents of the trust from your estate for Inheritance Tax purposes but still provide you with regular payments from it.


9. Business Relief

Business assets can usually be passed on either in your lifetime or after your death, with Inheritance Tax relief of up to 100%. A business, interest in business or shares in an unlisted company will usually qualify for 100% Business Relief. Land, buildings and machinery related to the business will usually qualify for 50% Business Relief, as will shares controlling more than 50% of the voting rights of a listed company.


10. Agricultural Relief

If you own agricultural property (land or pasture used to grow crops or rear animals as part of a working farm), this can usually be passed on in your lifetime or after your death free from Inheritance Tax.


Not sure how to best reduce the IHT bill for your beneficiaries?

Talk to us. Together, we can look at your current estate and finances, and work to identify ways to reduce that IHT bill in ways that suit you and your family best. We can also introduce you to our sister company Panthera Wealth for regulated financial advice if required

« Return to Paul's Blog

To put it in a nutshell, Panthera are a very professional company which also believes in the personal touch.

Join Our Mailing List

Sign up to receive our regular newsletter with the latest news and tips on all things Estate Planning

Sign Up Now