Steps to reduce inheritance tax as more families dragged into 40% levy


Inflation and the growth in the value of assets like property and investments have meant that IHT paid to HMRC has ballooned from £2.3billion in 2009/10 to £6.1billion in 2021/22. The nil-rate band will be extended for two years from the previously announced 2025/26 until 2027/28 drawing more assets into the IHT net.

HMRC said that IHT receipts for April 2022 to October 2022 are £4.1billion, which is £0.5billion higher than in the same period a year earlier – an increase of 14 percent.

Julia Rosenbloom, tax partner at Evelyn Partners explained that there is a “very effective way of reducing or wiping out IHT liability”. She suggested some “easy steps” which can help people reduce their bill.

She said: “IHT has been described as a voluntary tax in some senses, as giving away assets during lifetime is a very effective way of reducing or wiping out IHT liability.

“But large gifts remain part of the estate for seven years, assets must be handed over ‘without strings’, and most savers prefer to retain access to their assets in case they are needed as they grow older.

“Smaller gifts can be made that leave the estate immediately but the limits are restrictive and are subject to the same shrinkage in real terms in the face of inflation as the nil-rate band.

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“Families who find that the freeze means their assets are being dragged over the IHT threshold can take some relatively easy steps to stay the right side of it, or to mitigate liability.”

She explained that “relatively straightforward steps” are to make a will to ensure one’s assets are distributed both as desired and without an unnecessary IHT liability, and to make good use of allowances.

In most cases, people can pass on assets of unlimited value to a spouse or civil partner without any IHT liability.

The transferrable nil-rate band means that when someone passes away, their surviving spouse will inherit any of the unused IHT allowance, potentially allowing them later to pass on up to £650,000 tax-free.


An amount that can grow to £1million if a married couple leaves their home to their children or grandchildren on second death (provided the estate is worth less than £2 million).

Additionally, she suggested putting life assurance policies in trust as another “good idea” that is more straightforward than it sounds.

Ms Rosenbloom continued: “Money purchase pensions are a very useful estate planning tool.

“If you die before 75, whether you have touched the pension or not, you can pass on a pension pot free of IHT and income tax for the beneficiaries.

“If you die after, it is still IHT free but the recipient will pay income tax as they draw down on the pension. So preserving a pension pot can be an effective IHT-reducing tactic, while also keeping savings accessible during lifetime.”

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Alternatively, people can invest in assets that qualify for Business Property Relief.

These investments can provide inheritance tax savings in two years rather than the normal seven years.

This exemption was originally aimed at small business owners, but also includes qualifying shares in unquoted trading companies, such as those listed on AIM, which can be purchased in ISAs.

Companies that qualify for this relief, including those listed on AIM, tend to be smaller firms, and their share prices are often volatile and illiquid.

Lastly, Britons can lower their bill by charitable giving.

She said: “One way to reduce the amount that HMRC takes from an estate in inheritance tax is to make a donation to charity.

“The donation is taken off your estate before inheritance tax is calculated, and if the donation is large enough – at least 10 percent of your net estate – the rate at which inheritance tax is levied on the remainder of the estate is reduced.”

The original freeze in the IHT threshold to 2025/26 was announced in the Spring Budget of 2021 by Sunak who was then Chancellor. That policy was set to raise £1billion over four years, according to the Treasury at the time, but that figure is now likely to be far higher thanks to soaring inflation.

The Institute for Fiscal Studies has estimated that extending the threshold for two years could raise as much as £500million if inflation returns to the target level of two percent in a couple of years as the BoE expects, but much more if it does not.


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