How to avoid inheritance tax

Merryn Somerset Webb explains how you could avoid paying tax on your estate - and earn yourself a nice long-term income at the same time.

I've been writing a bit about inheritance tax (IHT) recently.It turns out to be one of the most emotive financial subjects out there.

There is very little middle ground: readers either want it abolished immediately with a view to protecting their family assets, or they want it raised and made unavoidable immediately with a view to increasing financial equality in the UK.

However, there is one thing within the debate that, for the moment at least, everyone seems to agree on: if the tax can be avoided, they want to avoid it.

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If we had a financial agony page (maybe we should let me know if you think so), my guess is that the vast majority of questions from both the young and old would be about IHT. So, what's the answer?

If you are really serious about not paying, you could head for the Isle of Man where I spent some of last week.It was a little rainy, but the people seemed nice. And if you move there lock, stock and barrel, manage to establish it as your domicile (this means severing all your financial and social links with the UK), you can arrange it such that your heirs will not pay a penny of tax on your estate even when they repatriate the money to the UK.

I'm sticking with my UK domicile for now, partly because redomiciling is extreme stuff, but also because I hate small aeroplanes (and my flight involved a 19 seater).

But the good news (if you are on the capital protection, rather than the equality side of the debate at least) is that there are plenty of other ways to avoid IHT.

You can give your money away seven years before you die; you can buy and hold farmland (this is part of the reason why farmland has outperformed Mayfair property over the last decade); you can give away all excess income; you can create and pass on a family business; but best of all, you can buy and hold qualifying Aim-listed shares.

Clearly, you mustn't do this at random, but there are some nice little companies worth looking at. Post my trip to the Isle of Man I am rather taken with Manx Telecom (Aim: MANX). The brokers at Liberum point out that it "provides the full telecoms suite" to businesses and consumers on the island.

There's no real competition and, while there are occasionally noises made about the need for tax rises, there is still no corporation tax at all.It comes with a lowish price/earnings ratio of 12 times and a 6% yield, and should fulfil all the conditions for IHT relief.

So, how about that? You might be able to avoid IHT and get a nice long-term income as well without even having to fly to the Isle of Man.

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.