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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

A growing number of people are receiving large amounts of money from family and friends
Thursday 27 May 2021 Author: Laith Khalaf

Inheritances are growing as a share of national income, according to a report by the Institute for Fiscal Studies.

For those born in the 1960s, their inheritance is estimated to make up 9% of their lifetime income, but that is projected to rise to 16% for those born in the 1980s.

Much of this increase can be attributed to how well assets like shares and property have performed of late, compared to salaries. Bigger inheritances spell potentially bigger inheritance tax bills too.


A relatively small number of estates pay inheritance tax, but at 40%, the tax rate is high, and penalises the natural inclination for parents to pass on what they can to their children and grandchildren.

Inheritance tax is currently payable on the value of estates in excess of an allowance of £325,000 per individual.

You can also leave assets to your spouse with no inheritance tax charge, and indeed pass on any unused allowance too.

In addition, an extra £175,000 allowance is provided per person for passing on the family home, which therefore potentially allows a couple to pass on an estate worth £1 million between them. However, the property allowance is tapered for estates worth more than £2 million. Above these thresholds, inheritance tax is payable. There are ways to mitigate the tax, but they do require a bit of forethought.


Gifting is probably the most straightforward way to pass assets onto younger generations and remove them from your estate, but there is a rule which means that if you die within seven years of making a gift, inheritance tax is potentially payable on a sliding scale.

This creates a bit of a dilemma for parents who might not want to gift away their assets too early, as they may well need to draw on them to fund their own expenditure.

There are some exemptions from the sever year rule – in particular, the taxman allows you to gift up to £3,000 each year with no inheritance tax to pay, so if you think the tax might be an issue, it makes sense to use that allowance.


Another option is to consider setting up a trust, though this is a very complex area which should be navigated with the help of a financial adviser.

The benefit of setting up a trust is that you, or whomever you appoint as trustees, can keep control of the assets without paying the money over right away.

This might be useful if you are looking to pass money onto young children for instance. However, you need to be careful that the trust is set up in such a way as to mitigate inheritance tax.

You must also be willing to bear the cost of running the trust and any associated tax charges too. Importantly, money you pay into the trust is usually subject to the seven-year rule, which means if you die shortly after setting the trust up, your heirs might face an inheritance tax charge.


A SIPP (self-invested personal pension) might be a useful tool for you to use to pass wealth onto younger generations, though its primary purpose is usually to provide you with a retirement income.

You can nominate beneficiaries for your SIPP in the event of your death, and inheritance tax is not generally payable.

However, if you die after the age of 75, your beneficiaries will have to pay income tax on withdrawals, which could be 40% if they are a higher rate taxpayer, or even more if they are a big earner. They can take the money as an income rather than one lump sum, which might help them to minimise the tax burden.


You can also reduce inheritance tax by investing in some AIM shares, specifically ones that qualify for business property relief if held for a minimum of two years. Not all AIM shares will qualify, and while HMRC lays out the ground rules for what sort of companies do and don’t fit the bill, they don’t publish an approved list.

If you don’t wish to pick AIM shares yourself, there are some professionally managed AIM portfolio services out there which do it for you, though they do tend to be quite expensive in terms of charges. Unfortunately, you cannot buy an off the shelf investment fund that invests in qualifying AIM stocks. More information on which stocks might or might not qualify can be found in this article.


Whichever way you cut it, mitigating inheritance tax requires significant planning, and that’s a problem because it’s often a sensitive area to discuss with family members.

However, if you shelve the problem, it could cause financial stress for your loved ones, at a time when they will probably be least able to bear it. Whatever you choose to do, it’s a good idea to have a plan, and communicate it to all concerned.

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