Managing Inheritance Tax

iht planning

Like many other taxes, inheritance tax (IHT) allowances have been frozen over the last few years. This means that more people are now paying IHT. Recent data from HMRC has revealed that IHT collected between April 2022 and February 2023 totalled £6.4bn, this is £900m higher than the same period last year. So, what can you do to manage your exposure to IHT?

There is the tax-free allowance each of us is entitled to which is currently £325,000 (nil rate band) and a further £175,000 if you own your own home.

But the problem is that these limits have remained the same for a few years now. This coupled with increasing house prices means more of us are being dragged into the realms of IHT.

In fact, it’s estimated 10,000 more families could end up paying IHT. The Treasury could receive nearly £8 billion a year over the next few years.

So let’s look at what can be done.

How does IHT work?

IHT is basically a tax paid by your estate after death.  The tax is levied on all the assets in the estate including cash.

When you die, your estate is valued, and this value is subject to inheritance tax (IHT). Generally, any excess over the nil-rate band is chargeable to inheritance tax at 40%.

Here’s a short guide to IHT and how it works.


How can you reduce your exposure to IHT?

There are ways to reduce your inheritance tax bill.  Here’s a list of some:

  • Give it away

The easiest way to pass your wealth onto your loved ones without paying tax is simply to give it to them.

  • You can give up to £3,000 each tax year without it becoming liable for IHT. If you didn’t use the allowance last year, you can combine it and pass on £6,000.
  • Gifts of £5,000 to your children for a wedding are also protected from IHT; grandchildren can have up to £2,500.

If you decide to give away more cash, you can, but then you need to make sure you survive seven years.

If you die within seven years of making a larger gift, IHT will be payable. There’s a sliding scale.

  • Die three to four years after giving, the IHT rate lowers to 32%.
  • At six to seven years, it falls to 8%.


  • Give to Charity

This is another way to give. Donate at least 10% of your estate to charity and you pay a lower rate.

You can get a 4% discount on your IHT rate for the rest of your estate hence lowering it from 40% to 36%.  Many people leave a legacy in their Will to their favourite charity.


  • Put it in a pension 

Your pension, depending on the type of pension plan you hold, if it is kept invested could be used to pass on wealth as it is usually excluded from your estate for IHT purposes.

Nominate beneficiaries for your pension should you pass away before you receive it, and IHT isn’t normally payable.

But if you die after the age of 75 your beneficiaries will need to pay income tax on the money they actually draw down from your pension pot.

  • Invest it (carefully)

Making the right kind of investments might help you avoid IHT. An individual savings account (ISA) can’t help. ISAs are exempt from income tax and capital gains tax, but they form part of your estate for IHT.

There could be other solutions such as with Alternative Investment Market (AIM) holdings.

You should seek independent financial advice before considering investing in this market. Your capital is at risk and you could lose some or all of your investment.

  • Put it in trust 

Setting up a trust to hold your assets could keep them out of your estate, and out of the taxman’s reach. But the position has become more complicated in recent years, and it might not always be suitable.

The trustee can control the assets, rather than them being passed onto the beneficiaries right away. This might help if your beneficiaries are not known for financial prudence or are young children. You should seek independent financial/legal advice before establishing a trust.

  • Insure it 

You can take out a whole of life insurance policy large enough to mitigate some or all your IHT liability. You may need to regularly review the level of cover if your estate increases in value as the original sum assured may not cover the whole IHT liability.

Alternatively, you may choose a plan where the cover increases with inflation. Whichever option is chosen, have it written in trust. Your beneficiaries won’t struggle with a huge inheritance tax bill when you die, but while you are alive you will be paying monthly premiums.

  • Get some help

This is a complex area of tax and one not a lot of us like to think about.  But here’s our quick 3 step process to make things easier for you:


  1. Have you got a Will?  If not get one drawn up as a Will makes things much simpler.
  2. Are you likely to get caught by IHT.  Here’s a really good guide to IHT which should help you work this out.
  3. If you are likely to get caught, seek advice.  Get in touch with us. Call or email your normal manager or visit our  website . We can provide you with advice and help you plan for IHT.