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Is Inheritance Tax a Voluntary Tax?

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.

Many people are resigned to the idea that they will have to pay a large inheritance tax (IHT) bill on their estate one day. However, is this the case?

In 2014, left-wing politician Tony Benn made headlines by leaving a £5m estate to his children whilst avoiding a large IHT bill. Records from his will and the Land Registry suggest that he had been planning his estate for this purpose at least 10 years before his death.

Many financial planners have noted the intricate strategies he used to minimise his IHT exposure, particularly by leaving many of his personal effects (i.e. 795 boxes valued at about £500,000, including his smoking pipes) to the British Museum via the Acceptance in Lieu scheme. This scheme allows “precious heritage objects and significant works” to be transferred into public ownership in return for a significant reduction in IHT.

These sorts of strategies might work for extremely wealthy families who possess a wide range of asset types which are easier to arrange for tax purposes (e.g. companies, art, properties etc.). However, what about the “ordinary well-off” or “mass affluent” who might own a home worth, say, £1m whilst holding £500,000 in assets elsewhere?

These people, admittedly, can find it more challenging to find the same manoeuvrability within the IHT regime open to the very wealthy. However, there are certainly many avenues still open to you which you can discuss with your financial adviser.

Let’s turn to some of them now. Before we proceed, it’s important to quickly note that in 2019-20, IHT is levied at 40% on the value of an estate which exceeds £325,000 (with some important exceptions, some of which are discussed below).


#1 Business Property Relief

Suppose you own shares in a business and are approaching retirement. Could you possibly transfer your shares to your son or daughter (who is interested in taking them up), with the intention of passing on these assets without facing IHT?

Here, we recommend consulting an independent financial adviser to ensure you make the best, most informed decision. In principle, however, if you leave these shares to your son/daughter you may qualify for business property relief, a valuable inheritance tax exemption (IHT). If such shareholdings do not qualify for business property relief could speak to your adviser about gifting your shares to your child whilst approaching retirement, either as a single transfer or in phases. These shares would likely face capital gains tax (CGT), subject to “holdover relief”. If seven years pass from the date you sold the shares, then they should no longer be liable to face IHT.


#2 Pension build-up

Most of your assets are likely to be taken into account when calculating the value of your estate for IHT purposes. One of the notable exceptions in 2019-20, however, is your defined contribution pension(s) which can be passed on to your beneficiaries free from IHT (although the amount they receive might be added to their income tax bill if you die over the age of 75).

If you have significant sums of capital tied up in personal savings accounts or ISAs, therefore, then it might be worth speaking to your financial adviser about transferring some of these funds into your pension. In 2019-20, you are allowed to contribute up to £40,000 into your pension each tax year (or up to 100% of your salary; whichever is lower, although you could possibly “carry forward” your last three years’ worth of annual allowances). Once you start withdrawing money from your pension, however, you are likely to be subject to the Money Purchase Annual Allowance, which limits your annual pension contributions to £4,000 per year.


#3 Second homes

For those who own another residential property in addition to their family home, it can be difficult for many people to know how to incorporate this into their estate planning. Fortunately, this is where professional financial advice can help.

One approach might be to consider transferring ownership of the property to your children, as a “no-strings-attached” gift. This can be an attractive option for those who have no intention of ever living in their second home. However, it does come with risks which you must run past your financial adviser. If you die within 7 years of making the gift, then the value of the home will likely face IHT (although perhaps at a “tapered” rate, depending on the number of years which have passed). To plan for this possibility, it might be worth taking out an appropriate life insurance policy, written into a trust. This can help ensure that a lump sum is provided to help cover any IHT due on the second home, without your children needing to sell it to pay the bill. There may well be capital gains tax issues as well which will need consideration.



These are just three of the many strategies you might want to consider when it comes to planning to minimise your IHT exposure. There are many other options we can discuss with you, if you are interested in knowing more and organising your own estate effectively.

Here at Castlegate, we can offer you an initial, no-commitment pension consultation at our expense to help you clarify your strategy and goals. To get started, contact us on:

01476 591022