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The inheritance tax waltz

Avoiding the sting of inheritance tax can be mitigated through careful planning

Inheritance tax is currently is taxable at 40 per cent on assets worth more than £325,000.  Here are some of the ways you can reduce your tax burden:

Add life insurance and pension payouts to your trust arrangement

Adding your life insurance policy to a simple trust arrangement ensures that all proceeds on death go to the ultimate beneficiaries, for example your children. This is currently non-taxable. Around 4 percent of inheritance tax paid on bereavement is sliced out of life insurance policies. To arrange this get in touch with your financial adviser or the issuer of the policy.

Similarly a pension lump sum is exempt from inheritance tax. However, if it is transferred into the surviving spouse’s bank account, it becomes taxable. This is why it is a good idea to strategise and set up a trust to ensure that funds remain outside the taxman’s remit and yet available to the beneficiary.

Early planning

Gifts given during your lifetime are not subject to inheritance tax as long as you live for the next seven years. The annual gift allowance is £3000 and this carries forward to the next year. Therefore it is possible to transfer assets in piecemeal without facing the taxman’s cleaver.

There are also small time exemptions such as the parent’s gift allowance of £5000 in the event of marriage and the grandparent’s tax exempt limit of £2500.

With clever financial planning it is possible to derive income from money paid into a trust even though you are not the legal owner of that trust.

Scale down your estate

This one is glaringly obvious. You cannot be taxed on assets that you do not own. For example if you receive a legacy on bereavement you can transfer it as a gift to another person by applying for a deed of variation within two years of receiving the money.


Inheritance tax can be wholly or partially exempt for investments in unquoted businesses, the Alternative Investment Market, farms and woodlands.

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