Inheritance tax payments reach record high: how to protect yourself

Financial planning December 8, 2016 by Gary Adams

The amount of the money the UK government has received from inheritance tax (IHT) has reached £4.7 billion for the year ending 31 October. This is up 11.9 per cent from a total of £4.2 billion in the year ending 31 October 2015.

According to Wilsons, a law firm that specialises in private client law (among others), more and more people's estates are leaving the tax free threshold behind due to the inflation in house prices, along with a freeze on the threshold level itself.

Essentially, owners of modest homes have found themselves being grouped with the rich.


IHT replaced the 'capital transfer tax' in 1986. This replaced 'estate duty', in 1974, and so on and so on, deep into history - 1694, in fact, as far as anybody can tell.

The basic set up is that anybody leaving an estate behind is taxed 40 per cent on anything above £325,000.

The threshold rose steadily each year until April 2009, but it hasn't since. As inflation and house prices have risen since then, IHT has acted as a tax rise.

However, from April 2017 there will be a new threshold for what is being called a 'family home allowance'. Married couples (and civil partners) will eventually be able to pass on assets worth up to £1 million tax-free as long as they are a homeowner.

This will be tapered in as follows:

  • 2017/18: an extra £100,000 per person
  • 2018/19: £150,000
  • 2020/21: £175,000

Another addition to the system will be the 'inheritance tax credit', which will be used to encourage people to downsize in their old age.

Despite the amount of press IHT gets, the majority of estates still don't touch the threshold (just over 7 per cent did in 2015/16), and when the new rules activate, the thinking is that the number will shrink.


Meanwhile, there are ways to minimise your exposure as the government has designed a lot of flexibility into the system. Courtesy of Wilsons, here are some of them:

The annual allowance

Each person can give gifts totalling £3,000 per year, tax-free.

The small gift allowance

You can also give away £250 to as many people as you like without incurring any IHT. The only stipulation is that the recipient can't be somebody you've used another exemption on.

Surplus income

If you can prove that you have more money than you need to live on, this surplus can be given away IHT free. This is very vague, but generally the idea is that once the gift is gone, the donor must be able to maintain their standard of living.

It's also advisable to ensure that these gifts correspond to a 'settled pattern' - i.e. this has been part of, or it is intended to be, a regular occurrence.

Giving away property

Look into contributing to a deposit or co-owning a house.

Varied deeds

Essentially, this allows one to change a person's will after their death - as long as the beneficiaries of the original will agree.

An example of how this could work is if the beneficiary grows up, has a child, and wishes to pass on their inheritance directly to their child, thus keeping themselves below the threshold.

Clever pensions

Finally, think about your pension. If a pensioner dies once they're over the 75 years line, the pension will pass on free of IHT - however, income tax will still be a factor. So, if this pension is designated to pass on to somebody who pays less tax (or none at all), everybody wins.

Jessica Broxup, a solicitor at Wilsons, adds: 'As a general rule it's a good idea to review your will every five years to ensure its still fit for purpose.'

This article was written for our sister website Moneywise.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment