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Under-the-radar options to reduce an IHT bill

Previously a tax reserved for the very wealthy, inheritance tax, or IHT, is becoming an issue for more and more families. Learn the simple steps you can take to reduce a potential inheritance tax bill from estate planning expert Ian Dyall.

Published on 07 Aug 20236 minute read

Written by Ian Dyall

Over the last decade, revenues from inheritance tax have soared by a whopping 108%.1 Rising house prices and stagnant allowances have brought more households into the inheritance tax net.

To put this in perspective, IHT raised a record £7.1 billion in the last financial year; £1 billion more than the year before.1 Here are the key influences driving household tax bills higher:

  • £325,000 IHT threshold frozen since April 2009
  • Reduced income tax thresholds
  • Slashed capital gains tax allowances

Understand how taxes work on inherited property

Inheritance tax can become particularly problematic where property comprises most of the estate. Beneficiaries are left with few liquid assets to foot the bill, which will often fall due before a property can be sold. This can create real financial hardship.

Against this backdrop, taking simple steps to reduce an IHT liability makes sense. There are a few straightforward options:

  • Gifting during your lifetime
  • Drafting your Will in a way that exemptions are maximised
  • The use of trusts
  • Investing in assets that benefit from business relief

There are also a handful of lesser-known tactics that can be equally effective that we will cover in more detail:

  • The resident nil rate band 
  • Ongoing gifts out of surplus income
  • Gifts
  • Defined contribution pensions
  • How we can help 

The resident nil rate band explained

On top of the £325,000 nil rate band IHT exemption, there is an additional £175,000 residential nil rate band exemption when your main home is passed to your direct descendants on death. This includes your children and grandchildren, stepchild or foster child.

Unused nil rate band allowances are passed on to the surviving husband, wife or civil partner. This creates the possibility that the surviving beneficiary could pass on £1 million without triggering an inheritance tax bill:

2 x £325,000 nil rate band


2 x £175,000 residential nil rate band


Total passed on with no IHT


This is as long as the property is worth at least £350,000 at death. There are also options to claim downsizing relief where the property has already been sold (if it was owned in July 2015).

Finally, the residence nil rate band reduces for large estates. When the estate exceeds the £2million taper threshold, the resident nil rate band is reduced by £1 for every £2 of value. Tapering can reduce the resident nil rate band to zero if the estate exceeds £2.35 million.  

Go deeper: learn more about why nil rate band transfers can be useful for estate planning and saving inheritance tax with our straightforward four-minute read, Nil rate band transfers – how do they work?

Ongoing gifts from surplus income can help you pass on money tax-free

Surplus income is what remains after all your outgoings have been paid. Your income includes:

  • Earnings from employment and pensions
  • Interest
  • Dividends
  • Rental income
  • Income from life assurance bonds and purchased life annuities is treated slightly differently

Everyone gets an annual gifting limit of £3,000, but this may not go very far across multiple grandchildren, or make much of a dent in, say, university fees. More useful, for IHT purposes, are the rules around gifts out of surplus income. It remains an under-used relief.

While the number of estates faced with an IHT charge hit a 20-year high of 41,000 in 2022, up from 33,000 the year before, in the last year only 430 families took advantage of this exemption yet made a substantial combined saving of £67 million.2 

Gifts: a simple way to reduce inheritance tax

Gifts can be as simple as setting up a regular standing order directly into the recipient’s bank account. Or you might want to set up some sort of policy for the recipient, such as a life insurance or pension plan, and pay the regular premiums out of your surplus income.  

Parents or grandparents can pay into a Junior ISA, Junior SIPP or a bare trust to set aside money for children. You could also consider a discretionary trust for greater flexibility and preserve assets for future generations.

If gifts are made from your income, form a part of your ‘normal expenditure’, are paid out on a regular basis, and do not have any impact on your own standard of living, they will be exempt from IHT and neither the recipients nor the estate will pay tax on them.   

Defined contribution pensions can help reduce IHT

Many savers recognise the income tax benefits of pension saving. yet not many know they can reduce the IHT liability of their estate.

Put simply, defined contribution pension pots are not subject to IHT as they are not counted as part of your estate. This applies to funds remaining in either a defined contribution pension pot or in drawdown but does not apply where a pension pot has been used to buy an annuity.

If you die before you turn 75, whoever inherits your remaining pension pot does not have to pay inheritance tax. They can also draw on the money with no income tax to pay.

If you die after age 75, your heirs pay no inheritance tax but will be charged income tax at their marginal rate for any withdrawals.

Good to know: make sure the details on your pension policy where you nominate the person(s) who will benefits in case of death are correct and up to date.

All this has implications for estate planning. You might for instance choose to draw on other savings and assets – which would count as part of your estate – to fund your retirement, leaving your pension savings intact as far as possible.

You might also choose to funnel funds from elsewhere into your pension, with IHT efficiency in mind. This comes with the added advantage that the pension will be accessible right up to until death. Please note if you choose to do this the pension funds would not be available until you turn 55 (changing to 57 in 2028).

Go deeper: What happens to your pension when you die? explains how your pension is managed on death.

How we can help you plan to mitigate inheritance tax

As always, rules may change with a new government, and how tax is applied depends on individual circumstances. IHT is an ideological wedge issue and always subject to revision.

A life insurance policy that covers the IHT liability can help remove some of the uncertainty for beneficiaries, but this needs to be written into trust so that the pay-out does not form part of the estate.

If you would like more information about the topics raised in this article, we’re here to help. You can book a free coaching session with a qualified financial planner and get an expert’s perspective on your plans whenever suits you.

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1 HM Revenue & Customs tax receipt data April 2023 and July 2022: IHT receipts were £3.401bn in 2013/14 tax year versus £7.086bn in 2022/23

2 HMRC’s ‘Number of taxpayers and registered traders’ 28 April: 
Plus Freedom of Information request by The Telegraph, reported 3 May 2023 

Important information

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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