Don’t pay more inheritance tax than you have to!


Soaring property prices in London and the South East may be boosting your family’s wealth but also giving you an inheritance tax headache. Taking action now could save you tens or even hundreds of thousands of pounds.

If you’re doing well in life and own a property anywhere near London, the taxman has you in his sights. As the value of your home rises, so will the amount of inheritance tax your family will have to pay when you die.

And if you have elderly parents in a similar position, the need to take action may be more urgent than you think. In fact, the sooner you start planning ahead, the better your chances are of shielding your family wealth from this deeply unpopular tax.

This checklist is a good place to start.

Taxing times.

London house prices are climbing to new highs, thanks to cheap mortgage rates and an influx of money from foreign investors. The average London property recently leapt in value by £18,573 in one month alone, as prices hit their highest level since 2005.

This is great news for HM Revenue & Customs, because it boosts the inheritance tax take. It collected £3.1 billion of inheritance tax in 2012/13, up from £2.9 billion one year earlier. Most of which was paid by a small number of wealthy people. People rather like you.

Inheritance tax is one of the most unpopular taxes of all, but with careful planning, it is also one of the easiest to avoid.

The big freeze.

There is another reason why inheritance tax is becoming a bigger threat. Chancellor George Osborne recently froze inheritance tax threshold at £325,000 until at least 2019.

If it had been allowed to rise in line with prices, it would have risen to £420,000 in that time. His decision will increase the average bill by £95,000.

Inheritance tax is charged at 40% of all assets, including your home, above that £325,000 threshold. So it your total estate is worth £750,000, you would pay 40% of £425,000. This will leave you with a whopping bill of £170,000.

That’s money you and your family could put to much better use.

Even after 2019, the inheritance tax threshold will only rise to £329,000. Inheritance tax is likely to become more of a problem in the years to come.

Marriage matters.

There are only a handful of tax advantages for married couples these days, but inheritance tax is one of them. Married couples don’t pay inheritance tax when the first partner dies, their £325,000 inheritance tax allowance automatically transfer to their partner. This means a couple can leave £650,000 tax free. That’s a start, but there is more you can do.

Potentially exempt transfers.

It is possible to reduce your family’s liability by simply giving money away, known as a potentially exempt transfer, or the seven-year rule.

Any gift will only be totally exempt from inheritance tax if you live for another seven years. This is designed to stop people giving away all their money just before they die to avoid tax.

If you die between three and seven years after making a gift, any tax due is reduced on a sliding scale, known as taper relief.

Remember, handing over your money can be risky, because it becomes the property of the recipient, who is free to spend it on whatever they like. You may struggle to claw it back later.


You can also make gifts of up to £3,000 a year to whoever you like, and this money will also be exempt from inheritance tax when you die.

The earlier you start gifting, the more tax you are likely to save.

If a 50-year old man with an average life expectancy gives away £3,000 a year he will have gifted £99,000 when he dies at age 83.

If his wife did the same, she would have gifted £105,000 by age 85. In total, that’s £204,000. Assuming this was all subject to 40% inheritance tax, they would have saved their loved ones £81,600.

Giving is good for you.

Parents can also give IHT-free gifts of up to £5,000 when a child gets married, or £2,500 for a grandchild. You can also make small gifts of up to £250 to any number of people each tax year, completely free of IHT. Donations to charities or political parties when you die are also exempt.

Another free gift.

HM Revenue & Customs lets you make regular gifts out of your post-tax income, provided you have enough left over to maintain your standard of living. This substantial concession from the taxman is widely under-used, particularly by those with higher incomes. You might want to seek advice on this one.

A matter of trust.

Another alternative is to set up a trust. This allows you to gift money tax efficiently, typically to children, while ensuring they don’t get access to it until they are at least 18, or even 25 or 30.

Growing numbers of ordinary people would benefit from setting up a nil-rate band trust. This can be set up on the death of the first spouse, to ensure children don’t end up with an inheritance bill on the family home when the surviving parent dies. This is just one type of trust, there are several more.

Other options.

There are other options. You could take out a whole-of-life insurance policy, which will give you a tax-free lump sum when you die, which can be used to clear any inheritance tax bill.

You could also shrink the value of your estate by raising money against your property through an equity release scheme. The debt will reduce your inheritance tax liability.

The enterprise investment scheme (EIS), which invests in higher-risk, start-up companies, can help you avoid inheritance tax altogether. After two years, the value of the EIS investment will fall outside the family’s estate, which means your beneficiaries will receive 100% of the return.

If you sell the shares, the profits fall back into your taxable estate, but you can reinvest them within three years and get immediate IHT relief.

Play safe.

You have to be careful when trying to cut your inheritance tax bill, or you could trigger an investigation by HM Revenue & Customs. It launched more than 9,300 IHT investigations in 2011, with the average person targeted having to pay £24,600 in tax.

Time to talk.

Three-quarters of adults have never discussed their likely inheritance with their parents. You might find it easier to discuss this subject with a professional, who can take a dispassionate view.

Want to learn more about planning for the future? Read the eGuide: The Five Key Risks in Retirement and how to manage them.