What is inheritance tax and what can I do about it?

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Once thought of as a tax for only extremely wealthy people to worry about, rising property prices have meant more estates than ever are likely to face an inheritance tax bill. HMRC collected £6.1 billion from thousands of bereaved families in 2021/22.In fact, the amount of inheritance tax collected currently is expected to reach £6.9 billion by 2023-24, an increase of £1.5 billion in just five years (OBR forecast March 2022).

When does inheritance tax (IHT) become payable?

If your estate has an inheritance tax liability, the people you want to leave your assets to, i.e., your beneficiaries, are the people who ultimately will have to pay the IHT bill. This may not be the kind of legacy most people think of leaving behind.

Inheritance tax is paid on the value of the assets that a person leaves behind when they die. It can also apply to some gifts and transfers that are made before someone dies. Your estate is defined as your property, savings and other assets after any debts and reasonable funeral expenses have been deducted.

This is something that many families can overlook, and the earlier you put plans in place, the more options you may have.

What can I do to avoid my family paying inheritance tax?

Currently everyone has a tax-free inheritance tax allowance of £325,000 – known as the Nil-Rate Band. The allowance has remained the same since 2009-10 and continues to be frozen until 2025/26.


The standard inheritance tax rate is 40% of your estate over the £325,000 threshold.


There is another allowance called the Residence Nil Rate Band (RNRB) in addition to the mentioned Nil Rate Band. In the current tax year, the RNRB is £175,000 each. This means a married couple, or civil partners could pass £1m to their direct descendants. The rate is maintained up to and including 2025/26. This is a complex allowance with various exceptions and caveats attached.

If you are married, or have a civil partner, you are able to leave your entire estate to your spouse or partner free of inheritance tax. But if you want to leave some or all of your estate to family and friends, then it may be liable for IHT. And you also need to consider, as part of your estate planning, what happens when the second spouse/partner dies?

At the very least make a will

Many people often procrastinate when it comes to writing a will. We would therefore encourage everyone to make a will as soon as possible. According to research by Canada Life 3 in 5 adults in the UK don’t have a will.


Making a will ensures you decide who gets what of your assets


If you don’t clarify your wishes in a will, the state will take over and distribute your estate according to a formula set out in the rules of intestacy. The results are not always what you would expect and can also potentially create unnecessary tax consequences.

Reducing Inheritance Tax liability

There are currently many ways, with careful financial planning, IHT can be reduced, offset, or eradicated altogether. Potential considerations could involve simply giving your money away to reduce your estate, such as lifetime gifts or through regular surplus income, using life assurance policies to protect any tax liabilities, through to setting up trusts to shelter your assets. Solutions do not, however, have to involve a reduction in your lifetime benefit of funds or assets, it is a case of determining what is the right solution for each individual and family.

Gifts and other ways to avoid IHT

Some gifts are usually tax-free. These include gifts between spouses and civil partners, and gifts to charities. Other gifts are potentially tax-free (known as potentially exempt transfers or PETs) depending on when they were made.


Generally, as long as a gift is made more than seven years before your death to an individual – not to a business or a trust – you won't pay tax on it


If you do die within these seven years, the tax payable on the gift may be reduced, depending on when the gift was made.

There are other ways to avoid inheritance tax, too - including putting your life insurance policy under trust or having a deed of variation in your will.

Trusts can also be a useful way to manage your IHT bill and keep an element of control over what happens to your assets when you pass away. Find out more in Our Guide to Inheritance Tax & Estate Planning

Early Inheritance Tax planning

Inheritance Tax is something that many families can overlook. The earlier you put plans in place, the more options you may have.

The rules, however, around IHT can be complex, and the amount of tax, and even the overall rate that will be paid, will depend on how your finances are structured during your lifetime, how you dispose of your assets and to whom you leave them.  Seeking independent tax and financial advice can help you pass your assets to the people you want to benefit and potentially mitigate some or all of the IHT liability.

At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. We provide bespoke tax planning, financial planning, and wealth management all under one roof.  Please note, advice on IHT related matters could be provided by a mixture of both our financial planning and tax specialists.


For more information or advice on how you can save on Inheritance Tax, get in touch with one of our financial planning team on 0808 144 5575 or email help@armstrongwatson.co.uk.

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