Ways to mitigate inheritance tax

The OBR recently forecast IHT receipts will increase by 37% and by 2028/29 potentially deliver £9.7bn to HM Treasury, driven by growth in asset prices, including shares and property.

With IHT receipts set to rise, there are various mitigation strategies individuals can consider reducing or, in some cases, remove their estate from the IHT net altogether.

Stacey Love, technical manager, tax, trusts and estate planning at Canada Life comments:

“IHT is largely a discretionary tax, in that many estates may not have to pay it at all if the various exemptions and gifts are used appropriately. This is an area of planning where it really does pay to seek appropriate financial advice.

“According to official estimates, more estates have the potential to be drawn into the inheritance tax net, so if you are concerned your estate be caught in the future now is the time to take stock, and take control. A regulated and qualified financial adviser will ensure your financial affairs are not only put in order for today, but equally that future generations will also benefit fully from any financial legacy you leave.”

When is inheritance tax paid?

Inheritance tax is a 40% tax applied after a person dies to estates where the net value of their assets exceed the nil rate band threshold of £325,000, taking into account any gifts made by the deceased in the seven years before death.

Tips for managing your estate tax efficiently

  • Make full use of the various exemptions and gift limits available, including; making gifts to your spouse or partner
  • You can also gift £3,000 annually to whomever you wish and any gift is free of any IHT liability,
  • You can gift for a wedding, while HMRC can also class small gifts as free of IHT
  • Gifts outside these limits are subject to the ‘seven year rule’ whereby if you die within seven years of making a gift IHT may apply
  • Through regulated financial advice, explore the use of appropriate trusts for your estate. Trusts can be used to not only control to whom and how you pass on assets, but also can manage any IHT liability
  • You can make a provision in your will to a charity which could reduce your IHT liability
  • Explore the option of certain business and agricultural relief if appropriate
  • Whole of life insurance policies are often used to cover the costs of an IHT bill of an estate


Frozen thresholds

There are two tax thresholds that apply when HMRC looks at calculating any IHT charge. Both have been frozen until at least 2027/28.

The Nil Rate Band is set at £325,000 (frozen since April 2009).

The Residence Nil Rate Band is currently £175,000.

This means, for an individual who owns their property, £500,000 is the total value of their estate before IHT comes into play. As a couple, these limits combine to an estate valued at £1m.

Presently, around 4% of estates each year pay inheritance tax, but official government forecasts show IHT receipts will grow by more than a third over the next six years due to rising asset prices, largely from house price inflation and share prices.

Office for Budget Responsibility, Economic and fiscal outlook, March 2024.

Inheritance tax (IHT) receipts are expected to raise £7.6 billion this year, an increase of 6.4 per cent on last year. We then expect it to fall slightly before picking back up over the rest of the forecast. This in large part reflects the growth path of house prices in the near term, and then the rise in share prices over the remainder of the forecast. Relative to November, receipts are largely unchanged across the forecast, with slight increases in 2025-26 and 2026-27 mostly due to higher house prices.