May 15, 2021

How to keep your Inheritance Tax low

It's all about planning

How does Inheritance Tax work?

In recent years, the sums that the government has raised from Inheritance Tax have rocketed. Last year it raised £4.9bn – more than double the figure of 10 years ago. Part of the reason is the increase in property prices. It's also partly due to frozen tax thresholds. However, a big factor is families' failure to plan. Some people are deeply frustrated that the fruits of a lifetime of hard work can be subject to a 40% tax charge. What's just as frustrating is that such high charges are very often, perfectly legally, avoidable. All it takes is a little forethought and planning.


Whenever someone dies, the value of their estate becomes liable for Inheritance Tax. Your estate includes everything you own, including your home and any trusts in which you may have an interest.

The first £325,000 of the value of your estate you can pass on free of any Inheritance Tax.

If you're married or have a registered civil partner, when you die, you can transfer your IHT-free allowance to your living spouse. This means you'll have a joint tax-free threshold of £650,000.

The 'residence allowance'

There is an extra allowance when a home or 'residence' is passed to a direct descendant. This is known as the residence nil-rate band (RNRB), which can also be transferred to a surviving spouse or registered civil partner.
In the 2017-18 tax year, the RNRB is £175,000 per person. This means a married couple with children can pass on a maximum of £1,000,000 in total without having to pay Inheritance Tax – two lots of £325,000 (£650,000) and two lots of £175,000 (£350,000).

Anything above this will be taxed at 40%. But that's not all. There are many other ways to reduce Inheritance Tax liability … if you plan ahead.

7 steps to reduce your Inheritance Tax liability

Step 1 – make a Will
Making a will is one of the most important things you can do to ensure your estate goes to who you want and that your wishes are carried out. Even if you already have a will, you might need to take action. For example, you might need to revisit your will to benefit from the residence nil-rate band.

Talk to us at METT Law to ensure that your wishes are met, and your wills are as tax-efficient as possible. One option is to set up a mirror will with your spouse, enabling each of you to leave your estate to the other. However, it might be preferable to make a will that transfers some assets to children or grandchildren after the death of the first spouse. It depends on your circumstances.

Step 2 - Lifetime gifts
Most people wait until death before passing on their wealth through their wills. However, it can be more tax-efficient for Inheritance Tax purposes to gift money while you are still alive.
This can have a transformative effect on both your and your family's life. Gifting money to a younger relative to top up their pension can substantially boost their income when they eventually retire.

  • Each year you can give a gift up to a certain value that won't be subject to Inheritance Tax.
  • You can also give £250 to any number of people each year.
  • Parents can give an amount to each of their children as a wedding gift. Grandparents can give money tax-free.

Gifts of any size to charities or political parties are also tax-free.

It is possible to make further tax-free gifts – potentially exempt transfers – but to avoid the amount being fully taxed, you have to survive for seven years after making the gift.

If you die within seven years and the gifts are valued at more than the nil-rate band, taper relief will be applied. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.

Step 3 – Think about your home
Typically, couples own their home as joint tenants. If one partner dies, the other automatically becomes the sole owner of the property.
This works for many couples, but for some, it makes more sense to be tenants in common. This means they each own a set share of the home, but it might not be 50/50.

This can help reduce an Inheritance Tax bill and long-term care costs. However, it's a complicated decision, so call us for advice before changing the way you own your home.

Step 4 - Take control with trusts
Trusts can reduce your Inheritance Tax bill and give you control over how your assets are used by your descendants.
Trusts can help you to -

  • keep a lump sum outside your survivor's estate to ensure it is not subject to Inheritance Tax
  • protect your children/grandchildren's legacy if your surviving spouse remarries
  • protect your children/grandchildren's legacy from their own marital disputes
  • avoid giving children/grandchildren a sum of money that they may not spend as wisely as you would like.

Trusts can be enormously beneficial but complex. So do talk to our specialists at METT Law about setting them up.

Step 5 - Don't forget life assurance
You can use life assurance to either meet or reduce a prospective Inheritance Tax bill. You set up a whole-of-life assurance policy, which lasts for as long as you live.

Step 6 – Consider discounted gift trusts
If you want to gift money to a trust, draw a regular income for the rest of your life and then pass what is remaining of the gift to your heirs, the amount will be free of Inheritance Tax. Again, call us to find out more.

Step  7– Consider available reliefs

Business Property Relief – typically this applies if you own

  • a qualifying trading business or an interest in one
  • shares in an unlisted qualifying company, including a minority holding
  • shares in a qualifying company listed on the Alternative Investment Market (AIM) of the London Stock Exchange

Entrepreneurs Relief
This is available if you own more than 5% of a business,

You get Entrepreneurs’ Relief on the sale of your share of the business during your lifetime. It’s especially important when you’re coming towards the end of your career to consider the Inheritance Tax implications. Again, talk to us at MettLaw about this vital, yet complex issue.

Agricultural Property Relief
This relief from Inheritance Tax is given on the value of agricultural property which has been

owned and occupied by you for the purposes of agriculture for at least two years ending with the date of the transfer (your death), or owned by you for seven years ending on that date, and occupied throughout, by you or someone else, for  agricultural purposes.

Here to help

As you can see, there are plenty of ways to reduce or get rid of altogether, your Inheritance Tax liability. Don't be one of the 47% of UK adults who never discuss passing on their legacy.

At MettLaw, we'll work with you to ensure you make use of all the reliefs and exemptions you can. We'll build a tailor-made succession plan based on your individual circumstances to make sure the allowances work best for you.

We'll give you the peace of mind of knowing that you have laid the firmest foundations for your family's future.


Find out more. Call us on 020 3813 2866 or send us an email.


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