Inheritance tax: what’s the law and how can you reduce the amount you pay?

Trust Matters, based in St. Albans, offer a number of products and services that can limit your inhe

Trust Matters, based in St. Albans, offer a number of products and services that can limit your inheritance tax liability. - Credit: Getty Images/iStockphoto

St. Albans-based specialist financial advisors Trust Matters explain how to avoid paying unnecessary tax after you die

St. Albans financial advisors Trust Matters can help you plan your estate to reduce the inheritance

St. Albans financial advisors Trust Matters can help you plan your estate to reduce the inheritance tax paid by your loved ones. - Credit: Getty Images/moodboard RF

Revenues collected by HMRC from death duties continue to grow – having doubled last year to a record £5.23 billion. This is partly due to rising house prices increasing the value of the average estate.

In the face of this, many of us are wondering how we might reduce our inheritance tax liability, especially when it often seems that the wealthiest avoid paying the tax altogether. This was the case recently, when The Duke of Westminster died and left his estate of more than eight billion pounds to his heirs, with no death duty applied.

The key to this success in inheritance tax avoidance was careful planning. Here are some important things you should know when considering how to reduce the tax you are liable to pay upon death.

Trust Matters can advise you how to make use of tax efficient investments such as AIM ISAs to reduce

Trust Matters can advise you how to make use of tax efficient investments such as AIM ISAs to reduce the inheritance tax on your estate. - Credit: Getty Images/iStockphoto

What is inheritance tax?

Inheritance tax (IHT) is a tax on the estate (property, money and possessions) of the deceased.

Who pays the tax?

St. Albans financial advisors Trust Matters have experts in a range of estate planning services.

St. Albans financial advisors Trust Matters have experts in a range of estate planning services. - Credit: Getty Images/iStockphoto

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The executors of your will are responsible for paying the inheritance tax bill, for example your spouse, civil partner or children. It is important to note that your executors usually have to settle the outstanding liability within six months of death to avoid paying interest to HMRC.

How much will I pay?

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Every person has a nil rate band (£325,000) which means that the first £325,000 from their estate is exempt and can be passed on tax free. Married couples therefore benefit from a combined nil rate band of £650,000.

Any excess above this threshold is calculated and payable at 40 per cent, although you can pay a reduced rate of 36 per cent, if you leave 10 per cent or more of the net value of your estate to charity in your will.

In April 2017 the residence nil rate band came into force, which gives you an extra allowance if you pass your residence, for example your family home, to your direct descendants (you must have lived in the residence at some point). This allowance is currently £125,000 per person and rises by £25,000 each tax year until tax year 2020/21, when it will be £175,000 per person. Married couples can therefore achieve a potential IHT threshold of one million pounds (£325,000 x 2 + £175,000 x 2), but there are complicated qualification rules for the allowance.

Is inheritance tax paid out of the estate?

The tax must be paid before probate is granted – it is therefore paid before the executors have access to the estate. This is something that many families struggle with. Once it is paid and probate has been granted, the executors can reimburse themselves from the estate.

What can I do to minimise my liability?

In 1986 Labour politician Roy Jenkins famously said “Inheritance tax is broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

His point was that there are a number of ways to reduce, or eliminate altogether, your IHT liability. Some, but by no means all, of these include:

Inheritance tax accounts

This is very much like a bank account in that you have access to your money at short notice. However, after two years the funds held in the account will be inheritance tax free.


If you’ve accumulated large ISA pots, you risk leaving behind a large inheritance tax bill when you die. That’s because your ISA investments are free from capital gains tax, but they are treated as part of your taxable estate after you die.

AIM ISAs address this problem. The investments are carefully selected companies listed on the Alternative Investment Market (AIM). Investments are expected to qualify for business property relief, meaning they would become free from inheritance tax after just two years.

They offer a fast and flexible solution to inheritance tax planning, allowing investors to retain control of and access to their money, while, as previously mentioned, delivering inheritance tax relief after just two years (provided the investments are still held at the time of death) and taking advantage of the tax benefits of an ISA wrapper.

You can make a cash subscription using this tax year’s current ISA allowance (£20,000) and/or transfer your existing ISAs. You also have the option to withdraw money if you need it in future years.

Trust funds

Gifting assets to trust is usually a one way street i.e. you cannot have the fund back. It is free from IHT in seven years and can be held in trust as an investment in shares/unit trusts/investment bonds etc.

Trust Matters Reversionary Settlement

This is a new and exciting financial solution which is tailored to your circumstances and needs. It is a flexible trust that not only helps to reduce IHT, but also allows you to retain the ability to access your capital.

Why is making a will important?

Having a correctly structured will can help minimise taxation by ensuring your assets are passed to your designated beneficiaries in a tax efficient manner. The disposition of a person’s estate after death is governed primarily by the person’s will or, if no valid will exists, by the laws of intestacy.

Who can help with reducing my inheritance tax burden?

Financial advisers who specialise in inheritance tax planning, such as Herfordshire-based business Trust Matters. The company regards estate planning as a lifetime relationship with its clients and prides itself in offering a service which measures up to this belief.

Trust Matters will be holding three boardroom briefings this autumn, where you can find out more about reducing the amount of inheritance tax your loved ones will pay. These exclusive events will take place at their St. Alban’s office on:

• Wednesday 12th September – Octopus Investments – 11.30am

• Tuesday 18th September – Downing LLP – 11.30am

• Wednesday 19th September – Oxford Capital Partners – 11.30am

Visit the Trust Matters website for more information on the rules around inheritance tax, or to book your place on an inheritance tax boardroom briefing, email confirming the date(s) you wish to attend or alternatively call the St. Albans office on 01727 737 610.

Trust Matters Group is a trading style of Trust Matters Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority. This article does not constitute advice and is for information purposes only. Trust Matters is happy to offer advice for clients on these products although charges may be applied. AIM shares are generally considered to be higher risk than some other investments. Investments are subject to financial markets and can fall or rise in value. IHT benefits are lost if the product is encashed before death. Sufficient funds should be retained in non IHT protected assets to allow withdrawals to be made without loss of benefits should encashment be necessary.

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