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7 simple ways you can avoid UK inheritance tax in 2021 [Plus a case study]

By Stuart Ritchie - October 18, 2020

One of the best descriptions of inheritance tax (IHT) was written by British politician Roy Jenkins:

“It is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue…”


Assuming you don’t distrust your heirs more than you dislike the taxman, here are 7 clever ways to save your estate being eroded by IHT:

1. Spouse and civil partner exemptions

Gifts and transfers between most married couples and civil partners living in the UK are IHT-free. 

If your partner is not UK-domiciled however, limits can apply, and you should seek advice.

By transferring everything on first death to the surviving partner you won’t entirely remove your estate’s vulnerability to IHT. 

The IHT liability will arise when the second partner dies…

So, it may be effective to pass some of your estate to your children and grandchildren - up to the Nil Rate Band, or by using a trust - rather than simply transferring everything to the surviving spouse.

2. Annual exemption

Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year – and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year, (or £12,000 if your previous year’s allowances weren’t used up), and that gift won’t incur IHT.

You can continue to make this gift annually.

3. Small gift exemption

You are able to make small gifts of up to £250 per year to anyone you like.

There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year

4. Lifetime gifts exemption

Lifetime gifts are those made by you while you’re still alive.

If such gifts are made to help with another person’s living costs, e.g. an elderly relative or child, they are free from IHT.

Other lifetime gifts may be exempt as long as you make them regularly (e.g., annually), and they come from your regular income, (such as pensions, dividends, interest from investments etc.), without affecting your lifestyle.

There’s an important caveat however! 

Determining whether such a gift is exempt only happens after your death, and is subjective…

There’s a risk some gifts may be classed as being within your estate for IHT purposes if the taxman decides they did affect your lifestyle for example; therefore, if you are making habitual gifts it is important to document your intentions and keep a record of this with your will.

5. Marriage or civil partnership gifts exemption

If someone you know is getting married or entering into a civil partnership, you can give them a financial gift IHT free. 

The amount you can gift depends on your relationship to the recipient: -

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6. IHT-free bequests

Gifts or bequests to charities, political parties, universities and for national purpose or public benefit are IHT exempt.

7. Business owner exemptions

If you’re a business owner, you may be eligible for certain tax reliefs, depending on the type of business you own.

Often, a transfer made during life or on death will be completely IHT free.

The main business tax reliefs, which are subject to minimum periods of ownership, are as follows: 

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It's worth noting that you can only get the above-mentioned tax reliefs if the deceased owned the business or assets for at least 2 years before death.

You can also pass on agricultural property free of IHT if:

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A property owned before 10th March 1981 can also qualify for 100% relief if:

    • it would've qualified under Schedule 8 Finance Act 1975 had it been transferred before that date
    • the owner had no possible right to vacant possession between that date and the current date of transfer

In any other case, relief is due at a lower rate of 50%.

How a financial planner can set you up for the future and mitigate IHT

Below is a case study of a client and her husband.

My colleague and brother, Craig Ritchie, UK Chartered Financial Planner, met them to discuss their plans for the future.

With a young daughter, they were conscious their luxury lifestyles may not be working in their favour in the long run.

And they wanted to make sure they were not only properly set up for retirement but also able to leave a legacy for their daughter - all while minimising their IHT bill.

Here's a quick run down:

  • They are in their late 40s and had never taken financial advice before
  • Between them, they have two UK pensions
  • They live a glamorous life in Dubai, travelling the world and living in one of the most sought-after beachfront suburbs
  • Their daughter is 7 and at a private school
  • The wife is the primary bread winner and the husband is a freelancer
  • They recently sold their UK property and need help investing the cash
  • Combined, their liquid investments were valued at £750,000

Craig ran a cash flow model to better understand their finances and it became clear that, if they continued spending the way they do...

They'll run out of money before they turn 70.

Considering they're both fit and healthy, they'd need their money to last until they're at least in their 90s.

So they needed a proper plan to make sure that happened.

Here's what their plan included:

  • They reduced their monthly spending by 20% which allowed them to cut excessive expenditure while maintaining their high-quality lifestyle
  • A low-cost investment account was opened so they could get their cash working for them
  • Additional voluntary contributions were recommended to gap-fill previous years and ongoing contributions moving forwards
  • Their daughter will be taken care of later in life with a sizeable inheritance of $1.1 million, inheritance tax free

Because of their solid financial plan, including strategies to mitigate IHT, the couple is on track to achieve their retirement goals.

In addition, they're able to continue their way of life while knowing their daughter will be taken care of when she's older.

These are just some of the ways you can use clever financial planning to cut your IHT bill down to size.

Depending on your personal circumstances, you may be able to use a trust or trusts, wrapping assets and investments like an offshore investment bond inside, and further reduce your estate’s future liability.

But it's always best to work with a financial planner on this.

Here are 3 more useful resources for you, if you’re interested in gathering more information: -

Additionally, if you're looking for more information as a high-net-worth investor, you may find this page useful.

Talk to us today