Over the course of your life, you’ll have worked hard to ensure that you and your loved ones can enjoy a high standard of living. And of course, you’ll want your family to inherit the wealth you earned, so it can benefit them too.

That’s why it can often be painful to think about how deeply Inheritance Tax (IHT) could eat into the value of your assets when you pass away. After all, you earned your money and may have paid tax on it already, so it’s only fair that your loved ones should keep it.

According to predictions by the Office for Budget Responsibility (OBR), published by FT Adviser, British people are set to pay £37 billion in IHT over the next five years. This is a colossal amount, so if you want to know how to shield your wealth from it, read on for four valuable tips to cut your potential tax bill.

1. Giving to charity can reduce the amount of IHT you have to pay

Each person has an allowance for how much they are able to pass on to their loved ones without incurring IHT, which is known as the “nil-rate band”. In the 2022/23 tax year, this stands at £325,000.

If you plan to leave your primary residence to your children or grandchildren then it can rise by a further £175,000 with the addition of the “residence nil-rate band”. This brings the total amount you can leave to your loved ones before paying tax up to £500,000.

You should also remember that it’s possible to transfer any unused part of the IHT nil-rate band from a deceased spouse or civil partner to the surviving spouse or civil partner.

Since the nil-rate band is frozen until at least 2026, as your assets grow in value, they could push you over this threshold and result in a tax charge. For example, according to the Office for National Statistics (ONS), house prices grew by 12.4% in the year to April 2022. So, if the value of your home continues to grow as the nil-rate bands remain static, it’s more likely you’ll end up liable for IHT.

One useful way you can potentially decrease your tax liability is to give a portion of your wealth to charity, as this can have several benefits. For a start, when you donate more than 10% of your net estate to charity, your IHT rate falls from 40% to 36%.

In addition, any gifts you make to qualifying charities are themselves exempt from IHT regardless of the value of the gift.

Donating enough of your wealth can even lower the value of your estate to below the nil-rate band, meaning that your loved ones may not have to pay IHT on it at all.

2. Putting a portion of your wealth in a trust can protect it from IHT

One useful way to shield a portion of your wealth from tax is to put it into a trust. Essentially, this helps you to keep some assets out of your estate and you can set the rules for how and when they can be used. In some cases, you may still be able to earn an income from those assets.

Of course, there are also some downsides to this decision. One of the biggest is that once you’ve transferred some of your assets into a trust, this usually can’t be reversed, so it’s important to think carefully before acting.

3. Use life insurance to pay any IHT liabilities

As you’ll know, having the right type of protection in place can help you to overcome any unexpected issues you run into. But what you might not know is that you can also use it to cover any tax liabilities that your family might encounter after you pass away.

Taking out life insurance can mean that your loved ones will receive a lump sum, which they can then use to cover any IHT that’s due. While this doesn’t mitigate the IHT bill, it ensures that the full value of your estate can be left to your chosen beneficiaries.

If you decide to do this, it’s important to remember that the protection must be written in trust, otherwise the lump sum will count towards the value of your estate and potentially make your IHT problem worse.

4. Draw your retirement wealth in a tax-efficient way

When it comes to working out your IHT liability, not all assets are treated the same. That’s why, if you want to shield more of your money then it can be helpful to draw your retirement wealth in a tax-efficient way.

To put it simply, your loved ones can typically inherit your self-invested pension plans (SIPPS) without paying any IHT on their value, as long as you haven’t accessed them yet. However, once you’ve drawn an income from them, they are counted as part of your estate for IHT purposes.

That’s why it can often be wise to rely on your non-pension assets first, such as any ISAs you may hold. By drawing an income in this way, you can maximise the amount of pension wealth that you could potentially pass on to your loved ones.

Of course, if you want to be able to manage your estate in the most effective way, seeking professional advice can really help. A financial planner can enable you to pass on as much of your wealth as you can in a tax-efficient way, giving you one less thing to worry about.

Get in touch

If you want to know more about how to minimise the amount of IHT you have to pay, get in touch. Please email team@brunelcp.com or call us on 0117 214 0870.

Please note:

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

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