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Mar 11 2024

Tips on managing Inheritance Tax

UK inheritance tax is the most hated form of tax, with the government even considering scrapping it, but this is only in early discussions and for now inheritance tax is still present. In the last tax year, a record £7.1 billion was collected in inheritance tax by HMRC, with the expectation that this figure will be surpassed this year. In this guide, we’ll be exploring how you can manage and reduce the inheritance tax your loved ones will pay to ensure as much of your wealth is passed on as possible.


What is inheritance tax?

Inheritance tax is money that is paid to HMRC after your death, that is calculated based on the value of your estate. Your estate is made up of all your assets including money, businesses, property, investments, cars, and more. The government has set a threshold so that if an estate is worth less than the threshold, no inheritance tax needs to be paid. The threshold is frozen at £325,000 until 2028.

If the individual has a will in place, it will fall the executor of the will to arrange payment of inheritance tax. If there isn’t a will, the administrator of the estate will be responsible for this. However, in many instances, the tax is paid through the Direct Payment Scheme (DPS). This means if the deceased had money in their bank or building society, whoever is managing their estate can request some or all of the tax to be paid from the account via DPS.


How much is inheritance tax?

Reportedly less than 5% of estates pay inheritance tax as the threshold for it is quite high. You typically won’t have to pay this type of tax if:

  • The worth of your estate is under £325,000, referred to as the nil rate band.
  • All your possessions exceeding the threshold are left to your spouse or civil partner.
  • All assets beyond the threshold are left to a tax-exempt beneficiary, like a charity or community amateur sports club.
  • If you transfer your house to your offspring or grandchildren, the threshold can be raised to £500,000.

To break this down further, if your estate is valued over £325,000 the part of your estate that goes above the threshold could be liable for tax at the current rate of 40%.


Managing inheritance tax

As with several other taxes, inheritance tax allowances have been frozen, but this, along with rising property prices, has meant people are paying more. It’s estimated that 10,000 more families may end up paying inheritance tax, whilst the treasury could get nearly £8 billion over the next few years. There are a few different ways to manage and reduce your inheritance tax bill, which we will look at below.

How to reduce inheritance tax

An important first step to reducing the inheritance tax on your estate is to make sure you have a will in place. If you don’t make it clear how you want your assets to be divided, then the law will decide for you. This can mean that more money will be taken in tax than is necessary. It can be beneficial to instruct a lawyer to help you draft the will, particularly if your financials or family circumstances are complicated. It’s important to note that if you leave a minimum of 10% of your estate to charity in your will, your family will pay less inheritance tax.

You can give away up to £3,000 each tax year without it being added to the value of your estate, which means gifting your money can be a good option if you want to reduce inheritance tax. The money can be gifted all to one person or split between several people. Additionally, the allowance can be rolled over so if you didn’t gift it last year you can give away £6,000 worth of assets this year. There are also other options for gifts including £5,000 towards a child’s marriage or £2,500 for a grandchild’s wedding.

The money earned in your pension can be passed on to your relatives after you’ve passed away without being subject to inheritance tax, as a pension isn’t typically part of your taxable estate. Nonetheless, it’s important to remember that if you pass away before reaching 75, one or more individuals can receive the entire pension as a tax-free amount. On the other hand, if you pass away after 75, those who inherit the pension will be required to pay the maximum income tax rate on any withdrawals they make.

You might want to put some assets into a trust for a certain family member. A trust is a legal agreement where you decide who manages the money and who it is used for. There are several types of trust with some allowing you to ringfence the asset, which means it will fall outside of your taxable estate when you die. Trusts are a complex area and can be costly to set up, so you should always seek regulated and specialist advice from a professional.


Knowing your loved ones are going to have to pay tax on your estate after you pass can be frustrating, but hopefully this guide has provided some potential options to manage and reduce your inheritance tax bill. As experienced, professional accountants in Birkenhead, the team at Jan McDermott Chartered Accountants have the relevant knowledge and expertise to support with a wide range of accounting needs. Contact us today to arrange a free consultation and learn more about how our services can help you.