20/03/18The tax man received over £5 billion last year, don’t leave him an inheritance

Would you prefer the money you leave behind to go to your loved ones, or the tax man?

Last year, over £5 billion was taken from people’s estates in Inheritance Tax (IHT) and this year, that figure is set to rise again. (Source: Office for Budget Responsibility (OBR))

The good news is that IHT is largely avoidable and with careful financial planning, you could leave more of your estate to your loved ones, and less to the government.


1. Start planning

The sooner, the better.

Too many people put off estate planning until it’s too late. Certain strategies require time to pass before becoming effective, for example, making a large gift. Furthermore, we never know when the grim reaper will strike. So, don’t run the risk of dying with no plans in place.

The earlier you begin to plan your estate; the more time you will have to take advantage of the IHT-effective options you have whilst still alive.

2. Understand the numbers

Once you know what you are working toward, you can begin planning to make it happen. Determine how much you have and how much of that will be subject to IHT.

If you are not sure where to start, use this calculator to forecast the value of your estate and how much you could be at risk of losing to IHT.

3. Write a will

A will serves numerous purposes, including:

  • Detailing who you wish to receive your assets and money
  • Leaving instructions for the care of dependants
  • Ensuring that your wishes are followed and clearly set out
  • Speeding up the process of dealing with your possessions

However, perhaps the most important aspect of a will is that it ensures that your assets and money are handled in the way you set out; which should be the most IHT efficient way.

4. Talk to family

It might be a difficult conversation, but it is necessary to talk about what will happen when you die. Make sure that your relatives know how you feel and what you want to happen once you’re gone. This not only stops arguments but makes your loved ones aware of how they can help you to reduce your IHT liability.

5. Put someone in charge

Naming an executor or administrator will make the process of distributing your estate much easier for those you leave behind. At least one of your executors must be over 18 and capable of executing a legal document. Let the person or people who will be responsible for your estate know that you have named them as such and make sure that they are able to access your will and instructions with ease.

6. Use your time wisely

Whilst alive, you may wish to make financial gifts to loved ones. These will reduce your estate value and thus, IHT liabilities.

Each year, you can give gifts up to the value of £3,000, as well as:

  • As many small gifts of up to £250 as you like
  • Wedding gifts of £1,000 per person, rising to £2,500 for grandchildren and £5,000 for children
  • Unlimited amounts to charitable causes, political parties and non-profits

Other gifts given could be IHT exempt as long as you can prove that they are taken out of your normal income and you are not depriving yourself.

7. Consider trusts

Trusts can be used to hold assets, money and goods on behalf of another person. You can leave instructions on trusts to pay out when the beneficiary reaches a certain age or milestone. You can also use this to protect money you leave to loved ones from their spouse or partner. Finally, you can direct your life insurance policies to pay into trusts.

By doing this, the assets and money are immediately outside of your estate for IHT purposes, though the beneficiary may have to pay Income Tax on it.

8. Review your income sources

If you have money held in pension funds and can take an income from another source, it may be worth doing so, as pensions are not usually subject to Inheritance Tax and may be easier to pass on to loved ones upon death. Just make sure that you inform your provider of your nominated beneficiary and keep this information up to date.

9. Treat yourself well

Don’t avoid spending money to leave a bigger inheritance. Yes, it’s the selfless thing to do, but after working hard for so many years, you deserve to have some fun, too! So, if you need to reduce the amount you have in savings, why not spend it on that cruise you’ve been dreaming of?

10. Talk to a professional

Taking financial advice is one of the most sensible options when estate planning. Keeping up to date with all the latest policies, allowances and exemptions can be confusing, so let a professional keep you on the right track.

The Financial Conduct Authority does not regulate Wills, Trusts or Inheritance Tax Planning

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