There are some topics people will happily discuss over dinner.
Politics. Football. Property prices.
Inheritance tax is rarely one of them.
Perhaps that’s because talking about inheritance tax means talking about death. Or perhaps it’s because most people assume it’s a problem for somebody else. The sort of issue faced by aristocrats, landed estates and owners of stately homes.
The reality is rather different.
Increasingly, inheritance tax is becoming a problem for ordinary successful families. Not because they have done anything extraordinary, but because they have spent decades doing sensible things. Paying off the mortgage. Saving into pensions. Investing regularly. Building a business. Accumulating wealth slowly and steadily over time.
In other words, exactly what they were supposed to do.
You May Be Wealthier Than You Think
A million pounds sounds like a lot of money.
Yet in many parts of the country, a family home can account for a large chunk of that figure on its own.
Add a couple of pensions, some ISAs, perhaps a buy-to-let property or a portfolio of investments, and suddenly a family that feels comfortably middle-class discovers they have crossed a threshold they never imagined.
The result is that more and more families are finding themselves exposed to inheritance tax, often without realising it. And unlike income tax, where you might grumble and move on, inheritance tax can take 40% of the taxable part of an estate.
The Biggest Change You May Not Have Heard About
For many years, pensions have been one of the most effective inheritance tax shelters available.
That is about to change.
From April 2027, unused pension funds are expected to become subject to inheritance tax in many circumstances. For some families this could significantly increase the eventual tax bill and may require a rethink of existing estate planning strategies.
If your estate planning hasn’t been reviewed for a while, now might be a good time.
Start Planning Early
Most people have heard of the seven-year rule.
Broadly speaking, gifts made during your lifetime can fall outside your estate if you survive for seven years after making them.
Inheritance tax planning rewards those who start early. The longer assets sit outside your estate, the less there is for HMRC to tax later.
Of course, good planning isn’t about giving everything away. It’s about understanding what you can afford to pass on without compromising your own financial security.
One of the most useful exemptions is also one of the least well known. Regular gifts made from surplus income can be exempt from inheritance tax immediately, without the need to survive for seven years. For grandparents helping with school fees, parents contributing towards a house deposit or families funding Junior ISAs, this can be remarkably effective.
Spend More. Worry Less.
There is another way to reduce inheritance tax.
Spend some of your money.
That may sound flippant, but there is a serious point behind it.
Many people spend their entire working lives accumulating wealth, only to become reluctant to spend it once they retire. They continue living as though they still need to save for a rainy day, despite having more than enough.
I’m a big believer that money should be used to create memories as well as security. Take the family holiday. Fly business class occasionally. Treat the grandchildren. Pay for everyone to spend a week together somewhere special. Your children are unlikely to remember exactly how much they inherited.
They will almost certainly remember the experiences you shared together. As Bill Perkins argues in Die With Zero, money becomes less valuable to us as we get older, but the memories we create with the people we love continue paying dividends for the rest of our lives.
What About Trusts?
Trusts have long been associated with inheritance tax planning, although they are often misunderstood.
At their simplest, a trust allows assets to be set aside for the benefit of others while retaining a degree of control over how and when those assets are used.
They can be particularly useful where beneficiaries are young, vulnerable, financially inexperienced or where there are concerns about divorce or family disputes. Trusts can also play a role in inheritance tax planning, although the rules are complex and professional advice is essential before implementing any strategy.
Insuring the Problem
Not every inheritance tax solution involves reducing the tax bill itself. Sometimes the objective is simply to make sure the money is available to pay it.
This is where whole of life insurance can come into its own.
A whole of life policy is designed to pay out whenever you die. When written into trust, the proceeds generally sit outside your estate and can provide beneficiaries with a tax-free lump sum at precisely the moment they need it most.
Think of it as creating a dedicated fund to pay the tax bill. This can be particularly useful where much of the family’s wealth is tied up in property or investments that beneficiaries may not want to sell immediately.
Whole of life insurance doesn’t reduce the inheritance tax itself. What it can do is ensure your family doesn’t have to make difficult financial decisions at an already difficult time.
Don’t Let the Tax Tail Wag the Dog
Whenever inheritance tax is discussed, there is a temptation to focus exclusively on saving tax.
That is usually a mistake. The purpose of your wealth is to support your lifestyle, provide security and help the people you care about. Tax planning should support those objectives, not dictate them.
The goal isn’t to die with the lowest possible inheritance tax bill.
The goal is to make the most of your money during your lifetime while passing as much as possible to the next generation.
Final Thoughts
Inheritance tax is likely to affect more families over the coming decade, not fewer.
The good news is that there are still plenty of opportunities available for those who plan ahead. Whether that involves making gifts, using exemptions, reviewing pension nominations, considering trusts, using life insurance or simply giving yourself permission to spend a little more, small actions taken early can often make a surprisingly large difference.
After all, if you’ve spent a lifetime building wealth for your family, it’s worth spending a little time thinking about how much of it they ultimately receive… and how much enjoyment you can all get from it before then.
If you’re unsure whether inheritance tax is likely to affect your family, or simply want a second opinion on your current plans, we’d be happy to help. Get in touch to arrange an initial conversation. Sometimes a one-hour meeting can save your family a great deal of tax, worry and uncertainty.
- This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
- Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of cash flow, estate or tax planning or trust advice.
- The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
- The value of investments may go down as well as up and you may get back less than you invest.