Tax savings

A legitimate and flexible way to reduce, even wipe out IHT – “the most unfair tax”

If your estate is worth more than £325,000 (£650,000 for married couples) plus an additional new allowance for your family home, under current rules it could be liable to 40% Inheritance tax when you die. 

There are several ways to legitimately reduce the value of an estate for inheritance tax purposes. However, they usually entail giving away or losing control of the assets. 

There is an alternative: investing in companies that benefit from Business Property Relief (BPR) – usually small companies that are unquoted or AIM-listed.

Here we explain the tax benefits in more detail with examples, based on current rules. Please remember though: tax rules can change. 

Save 40%

Investments in BPR-qualifying companies fall outside your estate, provided you’ve held them for at least two years at death. At the current IHT rate, this saves 40%. 

In addition, AIM shares that qualify for BPR can also be held in an ISA wrapper, so you can benefit from tax-free growth and income, in addition to the IHT exemption.

How does the IHT exemption work in practice?

Charles is divorced, with children who will inherit. His estate is worth £1,025,000. As he hasn’t done any IHT planning, other than making a will, his estate could be liable to £210,000 IHT. 

House
£500,000
Shares
£350,000
IHT portfolio assets
£0
Cash
£150,000
Other Assets
£25,000
Total estate
£1,025,000
Less nil rate band
£325,000
Less residence nil rate band (2020/21)
£175,000
Less other IHT exempted assets
£0
Taxable estate
£525,000
IHT at 40%
£210,000
Residual estate
£815,000

Edward is also divorced and his estate is also worth £1,025,000. However, unlike Charles, he’s done some IHT planning. Just over two years ago he invested £200,000 in BPR-qualifying companies through an IHT portfolio. His estate will be liable to just £130,000 IHT - £80,000 less than Charles’s. 

House
£500,000
Shares
£150,000
IHT portfolio assets
£200,000
Cash
£150,000
Other Assets
£25,000
Total estate
£1,025,000
Less nil rate band
£325,000
Less residence nil rate band (2020/21)
£175,000
Less other IHT exempted assets
£200,000
Taxable estate
£325,000
IHT at 40%
£130,000
Residual estate
£895,000
Saving
£80,000

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