3 effective ways to deal with Inheritance Tax and leave more to family

Woman offering gift

The coronavirus pandemic has affected our lives in many ways and, sadly, one has to been to remind us of our mortality.

That said, mortality is a subject many of us don’t want to dwell on, so it’s perhaps not surprising that recent research published in FTAdviser found 31% of over-55s had not checked to see if Inheritance Tax (IHT) could affect them.

The research also found that only a quarter of people knew what their IHT liability could be, with 52% saying they did not know.

While clarifying your IHT situation may not be the most appealing of financial tasks, doing so could dramatically reduce, or even negate, your estate’s exposure to it. This is because HM Revenue and Customs allow you to make gifts every tax year that could significantly lower your IHT liability and increase the amount you leave to loved ones.

Read on to discover why recent announcements by the government may cause your estate to have a higher IHT liability, and how you could reduce it.

IHT is liable on all your worldly belongings

While the tax is due on everything you own when you die, there is good news. You can have a certain level of wealth in your estate before it’s liable to IHT.

This tax-free amount is known as the “nil-rate band” (NRB) and, in 2021/22, allows you to have £325,000 if you are single or £650,000 if you are married.

You might also be eligible for the residence nil-rate band (RNRB) which could boost your tax-free allowance to £500,000 for a single person and £1 million for a married couple if you leave your home to children or grandchildren.

Anything above these thresholds is typically taxed at 40%.

Your exposure to IHT may increase after the 2021 March Budget

In the wake of the Covid lockdown, government data shows it borrowed more than £300 billion to shore up the nation’s finances – a record amount in peacetime. As a result, in his March 2021 Budget, the chancellor froze several tax breaks, one of which was the NRB.

This means the current IHT thresholds will remain the same until 2026. This could increase your estate’s IHT liability should the value of your property and investments continue to rise. According to FTAdviser, the Treasury expects IHT receipts to rise by £985 million in the next five years because of the freeze.

If you know what your IHT liability is, you could create a plan to reduce it

Understanding whether you have a potential IHT liability means you can take action to reduce or mitigate it if you do. You could also make financial provisions to cover the cost of any IHT liability, which effectively means loved ones could receive more of the money you leave them.

Here’s how you might achieve this.


Writing a will could ensure your wealth goes to the people you want it to. If you die without one, your estate is usually distributed in line with intestate rules, which means it may not reach the people you intended.

In addition, stating in your will that you want to leave money to charities or good causes could reduce your IHT rate to 36% (2021/22). There are regulations around how much you need to give to charity before your liability reduces, so speak with a financial planner to confirm these.


There are several gift exemptions you can make use of every tax year to reduce your exposure to IHT. If these gifts reduce your estate to below the NRB, you would typically not be liable for it.

The gifts include:

  • A £3,000 gift you can either give to one person or split between many people.
  • An unlimited number of gifts of up to £250 each, from normal income.
  • A £1,000 wedding gift to anyone, a £2,500 wedding gift to grandchildren, or a £5,000 wedding gift to your children.
  • Gifts made from income. While these can be for any amount, they must be made regularly, not come from capital and not reduce your standard of living.

Besides these, you could also use potentially exempt transfers (PETs), which allow you to give unlimited amounts to anybody you like. That said, you must then live for seven years after making the gift before it falls outside your estate.

If you die within the seven years, your estate could be liable to a sliding scale of IHT that’s calculated on the amount of time you were alive for after gifting.

Life insurance

In some circumstances, life cover could be used to deal with an IHT liability, for example, if it’s unlikely you’ll be able to gift enough to beneficiaries to reduce your estate to within your NRB.

Taking out life cover for the amount of IHT you owe and ensuring the payout from the insurance stays outside of your estate means two things.

Firstly, the money from the insurance payout can be used to settle the IHT liability, ensuring your beneficiaries receive the full value of your estate. And, typically, the tax liability can be settled more quickly, which means loved ones could receive their inheritance sooner.

Always speak with a financial planner to ensure your life cover is structured correctly, as not doing so could land loved ones with a higher IHT liability.

Get in touch

We can help you to confirm whether you have an IHT liability, and if so, what you might be able to do to reduce or mitigate it.

If you would like to discuss your potential exposure to the tax and how you may be able to leave more money to loved ones, email or call us on 01454 416 653.

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