Mitigating Inheritance Tax

Inheritance tax (IHT) is often described as the most disliked tax in the UK. After a lifetime of paying income tax, capital gains tax and other levies, many are dismayed to learn that the government may take a significant portion of their estate upon death.

The rules 

Under current rules, each individual has a £325,000 Nil-Rate Band. This can be doubled for married couples or civil partners, giving a combined allowance of £650,000. An additional Residence Nil-Rate Band of £175,000 per person applies if passing the family home to direct descendants, bringing potential allowances up to £1 million.

However, beyond these thresholds, IHT is charged at 40%. With rising property values and modest thresholds, many individuals find their estates exposed to this significant tax.

Recent legislation 

Recent legislative changes have compounded this issue. From April 2027, pension funds will fall within the IHT net, significantly altering traditional estate planning strategies. Similarly, reductions to Agricultural Property Relief and Business Property Relief introduce additional complexities, particularly for farmers and business owners.

A typical example illustrates the problem. Consider an estate worth £1.8 million, including the family home. After allowances, £800,000 could be liable to IHT, resulting in a tax bill of £320,000 — a significant erosion of family wealth.

Steps to mitigate your exposure to IHT

There are, however, proactive steps to mitigate exposure:

• Lifetime Gifting: Potentially exempt transfers (PETs) allow individuals to gift assets during their lifetime, with the value falling outside the estate after seven years. Structured appropriately, this can significantly reduce the IHT burden.
• Trusts: Appropriately structured trusts can remove assets from the estate whilst retaining a degree of control. Trusts can also help in situations involving vulnerable beneficiaries or complex family dynamics.
• Life Assurance: Whole-of-life policies written in trust can provide funds to cover IHT liabilities, avoiding the need to sell illiquid assets such as the family home or business.
• Regular Reviews: Family circumstances, legislation, and asset values change. Reviewing wills, LPAs, and IHT strategies every five years, or after major life events, is essential.

Bear traps 

Common bear traps include failing to account for death-in-service benefits or life insurance not written in trust, which inadvertently inflate the estate. Likewise, misunderstanding the interaction between pension pots and IHT can leave families exposed.

A further complication arises with the need to settle IHT liabilities before probate is granted. This often catches families unaware, particularly when estates are asset-rich but cash-poor. Without careful planning, this can force the sale of family property or business assets.

Get in touch 

Professional advice is indispensable. Estate planning is intricate, requiring strategies tailored to individual circumstances. Through careful, proactive planning, it is possible to ensure that your hard-earned wealth benefits those you choose, rather than being eroded unnecessarily by taxation.

At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help individuals and families navigate these complexities with confidence and peace of mind. Please get in touch for more information.