Top ways to reduce Inheritance Tax – how you can save money on IHT bills

Top ways to reduce Inheritance Tax – how you can save money on IHT bills

Peter McGahan, the Chief Executive Officer of financial advisory firm Worldwide Financial Planning (WWFP), has outlined how people in the UK can leave money for their loved ones “rather than the tax man”.

Figures from the Government found that the average IHT bill in the country came to a staggering £209,502 for the 2018/19 tax year.

An individual’s assets can include their property, certain possessions and money, according to HMRC.

Currently, the standard Inheritance Tax rate is 40 percent, however it is only charged on the part of an estate that’s above the threshold of £325,000.

“There are many other methods of mitigating tax so here are tips to some of them so as to leave your money to your loved ones rather than the ‘beloved’ tax man,” Mr McGahan shared.

Take advantage of trusts

One of his first suggestions to the public is to take advantage of trusts. Assets which are left in trusts are not subject to IHT.

Mr McGahan said: “If you have a life insurance policy, it may pay out on death into your estate, which simply increases your estate for Inheritance Tax.

“That policy could be written into trust to take it outside your estate and over to your beneficiaries with a simple trust document.

“There are also methods of gifting capital into trust now whilst you are still alive. Do not shy away, they are really quite normal and popular. A trust allows you to entrust your money to trustees (you choose them). They become the legal owners and manage it for the beneficiaries you choose.

READ MORE: HMRC warns millions of Britons are missing out tax savings

“Some trusts allow you to allocate the value of the trust on death to the beneficiaries but retain an interest in it via an income. One of these, for example, is a discounted gift trust, which allows you to set up an income when you set up the trust.

“The income returns to you over the term of your life and the remaining capital and its growth passes to the beneficiaries free of Inheritance Tax if you have lived longer than seven years.”

He added: “There is an added benefit in that the gift at the time is immediately discounted by your right to the return of capital, reducing your estate immediately. So if you are younger and healthy and were expected to live for a reasonable time, your initial gift is discounted by that amount.

“This is estimated at the time by the trust provider and is only agreed on death with the revenue. All future growth on the funds you invest into are also free of Inheritance Tax.


“A loan trust is another trust but with this scheme you appoint trustees and make a loan to them and then are allowed to withdraw that later as loan repayments. Its key benefit is that the growth on the money invested is outside the estate.

“There are other trusts, but space prohibits coverage of these and your Independent Financial Adviser, accountant or solicitor will advise on those.”

Know what relief you are entitled to

For the tax expert, business property relief can be a friend to those looking to reduce their IHT bill, however it does pose some risk.

“Look at your ISA and consider moving them to an AIM ISA to utilise business property relief which is currently a 100 percent relief on Inheritance Tax charged on assets that qualify,” suggested Mr McGahan.

“Make sure that you understand and are comfortable with the risks associated with this type of investment first though.

“Whilst Business Property Relief is currently 100 percent, that can change in later Governments so remember it is not set in stone.

“Also, many business owners currently enjoying the comfort of knowing they might have Business Property Relief on their businesses will of course lose that when they sell the business, with all assets from the sale moving into their estate.

“Not all business assets have 100 percent relief and your adviser can explain those to you.”

Cash gifts for loved ones

Mr McGahan advocates for cash gifts as means of saving money on IHT, as well as being an act of good faith.

“Use the cash gifts you can, and also gifts out of normal expenditure that you are allowed to make. They will be outside of your estate, and you get to see the smile,” he said.

Make a Will

Making a Will is crucial when planning ahead for the financial security of family, as well addressing any mitigating circumstances involving Inheritance Tax.

“Be sure to make a Will. Naturally, this will ensure your estate is passed to those that should receive it, but it will also facilitate your beneficiaries being able to alter your will after your death to navigate any changes in Inheritance Tax,” explained Mr McGahan.

“This is called a Deed of Variation and is available within two years of death.

“Whilst you are with your solicitor, you should also consider lasting Powers Of Attorney, which will allow people you trust to make decisions about your health and welfare and financial affairs if you become incapacitated.”

Published at Sun, 15 Aug 2021 09:31:00 +0000