Inheritance tax warning: Families are paying more than necessary to HMRC – take action now

10 mins read


Inheritance Tax (IHT) is generally an unpopular tax among British families and as such, many seek professional guidance on how they can best reduce or even avoid the levy. However, lack of action on this is set to cost savers millions over the coming years as more is unnecessarily paid to HMRC.

Estates at risk

Dawn Mealing, Head of Advice Policy and Development at Fidelity International, commented: “Out of those who are liable to pay IHT, women’s net estates are worth £1.3billion more than men’s. Yet, almost half have done no financial planning to make sure this wealth is gifted the way they want – something isn’t adding up.

“In general, women tend to have larger inheritances as they live longer, and therefore are more likely to inherit wealth from their partner. This leaves them facing even bigger decisions as it means they are responsible for both theirs and their partner’s wishes, and without help from an adviser they could find themselves lost.”

Unfortunately, by not having any financial plans in place, women are not just more at risk of paying too much IHT, but also not having their wishes around how their wealth is passed on fulfilled.

This is illustrated by examining the differences between how men and women plan on passing down their assets. Two-thirds (64 percent) of women plan on giving their money to adult children, compared to just 56 percent of men, while men are twice as likely to gift money to their parents than women (18 percent vs. nine percent).

Additionally, women are also less likely to make plans in the short-term in order to reduce their tax liability in the future. Despite one in five (19 percent) planning on gifting part of their wealth to family or friends in the next five years, 53 percent are unaware of the rules around giving money away at least seven years in advance in order to avoid paying IHT on certain amounts.

Ms Mealing concluded: “IHT is a subject that often confuses people, with various rules around exemptions, gifting assets, and the amount you should pay. However, from an emotional perspective, it also means that by not seeking advice you may not be able to give as much to those that matter most to you, or in the way you want. By discussing your plans with a financial adviser earlier on, you could avoid paying too much tax and be safe in the knowledge that your estate will be handled as per your wishes.”

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Tips for women planning on leaving an inheritance

Fidelity International shared the following advice for women on how inheritances should be managed:

  • Create a will: Fidelity’s research shows that only half (50 percent) of women aged 55-64 have created a will. This means if they pass away, they risk the things that matter most to them being distributed in a way that isn’t in-line with their wishes. This doesn’t just apply to money either – family heirlooms or businesses could also be passed on to someone you aren’t comfortable with if you haven’t created a will or if it’s not up to date.
  • Gifting while still alive: Each tax year you are able to gift up to £3,000 in total without being subjected to inheritance tax (IHT). You can gift this amount to as many people as you like, but it cannot exceed this amount. On top of this, you can also make wedding or civil ceremony gifts of up to £1,000 per person (increased to £2,500 for a grandchild and £5,000 for a child) and give as many gifts of up to £250 per person as you want, as long as you haven’t already used any other allowance on them. Gifts to spouses or civil partners, charities, museums, universities, some political parties, and sports clubs are also not subject to IHT.
  • Contribute towards pensions or savings: Another great way to support your family now while being IHT efficient is to contribute towards their pensions or savings accounts, such as a Stocks and Shares ISA. As long as this comes from your income, is a regular amount and doesn’t affect your normal standard of living, it would be classed as a ‘gift out of normal expenditure’ so would be IHT free. Contributions to pensions also attract tax relief, meaning your money will go further while helping set your family up for the future.
  • Investing for children: If you would like to use your wealth to help your children or grandchildren, then it may be worth gifting up to the tax-free allowance of £9,000 per annum to a Junior ISA or £3,600 per annum to a Junior SIPP. Both are tax efficient ways to save and can be contributed to regularly. Larger amounts can be gifted by investing in a bare trust, which cannot be accessed until the child or grandchild reaches 18. Gifting to children’s investments is exempt from IHT as long as you do not pass away for seven years after making the gift. If you do pass away during this period and you have already utilised your nil rate band by making prior gifts, IHT may be payable on a sliding scale. This is why it’s important to keep a record of the amount and timing of gifts.
  • Maximising your pensions: Pensions can be a great way to preserve your assets, as they are generally exempt from IHT. If you can, draw income from non-pension assets before taking income from your pension. You can also maximise your income and capital gains tax savings by taking income from ISAs, investment bonds (up to five percent per annum), or by encashing capital gains from investment funds up to £12,300 per year per person. Don’t forget to also consider your spouse’s source of income so that you make maximum use of both tax allowances and reliefs – in some cases it may be worth putting certain assets in each other’s names.

When is IHT levied?

IHT is levied on the estate of someone who has died and is passing on assets, so long as their estate is valued over £325,000. Where IHT is due, it is charged at 40 percent.

This 40 percent is only charged on the parts of an estate valued over the £325,000 threshold. So, for example, if an estate is valued at £350,000, 40 percent will be charged on £25,000.

IHT is not usually charged if either:

  • The value of the estate is below the £325,000 threshold
  • The person leaves everything above the £325,000 threshold to a spouse, civil partner, a charity or a community amateur sports club

Full details on IHT rules can be found on the Government’s website and impartial guidance can be sought from the likes of Citizens Advice and Money Helper.



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