Tax Planning

6 ideas to reduce inheritance tax

By July 15, 2022 No Comments

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

An inheritance tax (IHT) bill can cost families thousands of pounds if no careful planning is put in place. Fortunately, a range of tools is available in 2022-23 to help you reduce an unnecessary tax bill – leaving a more meaningful legacy for your loved ones. In this guide, we share six ideas to help you mitigate a future IHT liability. We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.  


What is inheritance tax in 2022-23?

In the 2022-23 financial year, you can pass down an “estate” (e.g. possessions and property) to beneficiaries without inheritance tax (IHT) if it is valued under £325,000. The worldwide value of an estate over that threshold (assuming you are UK domiciled) is normally taxed at 40%. This is paid by your executors within six months of your death. 


#1 The family home & “direct descendants”

If you pass down your main residence to “direct descendants” after you die (e.g. children or grandchildren), then you can pass down an extra £175,000 in your estate, IHT-free, via the residence nil rate band rules. 

For those considering renting in retirement, you may wish to consider buying a home, therefore, so you can eventually pass wealth to your loved ones in a tax-efficient manner. Homeowners should also bear this in mind when thinking about equity release, as it will reduce the value of their home. It may be better to turn to other assets first (e.g. to pay for care).


#2 Use ISAs before pensions

In 2022-23, the remaining funds in pension pots (defined contribution pensions) can be passed down to beneficiaries upon the estate owner’s death. Pensions, therefore, can be a valuable IHT-management tool as well as a great vehicle for retirement planning. ISAs, however, cannot be handed down tax-free (unless certain ISA shares qualify for Business Relief). 

Therefore, it can make sense to spend your ISA savings earlier in retirement before drawing more from your pensions. ISAs can also be accessed earlier, whilst you cannot touch pension funds until age 55. However, bear in mind that, if you die after age 75, any funds that your beneficiaries take from your pension will factor into their income tax bill.

Please note that your State Pension cannot be inherited. A final salary (or “defined benefit”) pension may offer reduced benefits to certain beneficiaries, like a surviving spouse.


#3 Giving to charity

The standard rate of IHT is 40% on the value of an estate over £325,000. However, this rate is lowered to 36% if you leave at least 10% of your estate to registered charities in your will. This can help save £1,000s in IHT whilst also giving to a good cause. However, bear in mind that it may not maximise the amount that your loved ones get from your estate.


#4 Make annual gifts

Each tax year, you can give up to £3,000 – i.e. to one person to smaller gifts to many people – without this getting counted as part of your estate for IHT purposes. Here, you need to carefully consider how much you can afford to give away whilst still alive. Yet maximising your annual exemption can save more IHT in the long term, letting you pass down more wealth. You can also give £5,000 to a child for his/her wedding day; £2,500 to a grandchild or great-grandchild and £1,000 to any other person.


#5 Make a will

Whatever you do, make sure you craft a legally-sound will to protect your estate. Those who do not will have their estate dealt with under the UK’s intestacy rules. These may not allocate your assets to the right people, or in the most tax-efficient manner. For instance, you can use a will to set up appropriate trusts, make gifts that use up your IHT allowance and ensure IHT exemptions are used at the right time.


#6 Use life insurance

You can use a life insurance policy to provide a payout to your beneficiaries when you die. This can help provide the funds to cover an IHT bill. However, this needs to be placed within a trust structure – otherwise, the payout will also be subject to IHT!

Here, it is best to consult a financial adviser to ensure that a life insurance policy will not end up costing you more than a future IHT bill. The monthly premiums are likely to increase as you get older, and the total could end up exceeding the value of the payout. Term life insurance policies are cheaper than those which are guaranteed to pay out (“whole of life” policies), but there is a risk that you may die after the term expires.

With this said, life insurance can be a great option if your estate otherwise faces a liquidity risk (i.e. your executors will struggle to sell enough assets within 6 months to cover an IHT bill).



If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire. 

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T: 01282 772938