Learn to stop worrying about inheritance tax

While it's getting ever harder to avoid paying inheritance tax, Merryn Somerset Webb explains why most of us don't need to worry.

How do you avoid inheritance tax (IHT)? It's one of the most commonly asked questions in the industry, and it isn't as easy to answer as it used to be.

Back in the good old days (or bad old days depends on how you look at it), anyone who wanted to avoid IHT just shovelled their assets into a trust of one kind or another and named their heirs as the beneficiaries. Job done.

But in 2006, this got harder to do. The government announced that henceforth all trusts valued at more than the nil-rate band (the threshold for paying IHT, currently £325,000) would pay a new tax of 6% of the value of their assets every ten years.

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That might have been that. But, as is always the way, clever accountants instantly spotted a way around the problem. They simply set up a variety of smaller trusts on different days (so they are not considered to be "related settlements") and made sure they all fall under the threshold. Again, job done.

Unfortunately, it looks as if HM Revenue & Customs is now catching up with the "tens of thousands of people" who have been using this trick too. In the upcoming autumn statement from the Chancellor, you can expect to see new proposals for multiple trusts to be taxed as one, says Kyle Caldwell in The Daily Telegraph.

That means three £200,000 trusts would be taxed in the same way as one £600,000 trust so at 6% of the excess over £325,000, or £16,500 (£275,000 x 6%). Pay 6% every ten years on a trust and it takes a while to pay the equivalent of the current IHT rate (40%). But it isn't exactly tax-free either.

So what else can you do? There are still a few complicated options various Alternative Investment Market (Aim) stocks come with IHT advantages, as do forestry and farmland.

But still, the easiest way for a family to stay rich is to be very rich in the first place. Give away any capital or property you don't need (if you do need it and keep using it, you can't give it away for tax purposes), live seven more years and there isn't a penny to pay.

The same goes for income. If you don't need it and giving it away doesn't change your own standard of living just give it away. Gifts out of income are free of income tax, regardless of when you make them relative to your death (no seven-year rule here).

Finally, while it sounds obvious, Brewin Dolphin notes that a lot of people waste an awful lot of time worrying about IHT when they aren't ever likely to have to pay it: transfers between husbands and wives are exempt, as are the nil-rate bands. So the wealth of a couple is not taxed until it passes £650,000.

So while homeowners in the south might have good reason to worry, the rest of the country can probably rest a little easier. Note that in 2011/2012, nearly 250,000 estates paid no IHT at all, while 15,584 paid a total of over £2bn, or just over £180,000 each.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.