By Keith Brooks

Most of us are probably familiar with the old saying the only things in life that are certain are death and taxes.

But when those two subjects collide it can be

a source of some concern and can be a shock to your financial situation.

One of the most important but possibly less understood taxes that can arise when someone dies is that of inheritance tax, or IHT.

Whilst the prevailing view was that IHT generally would be something only the

super- wealthy might need to worry about,

over the years, particularly with the growth in property values and the subsequent rise in the value of estates, an increasing number of people are now potentially falling within its grasp.

Indeed, HMRC reported an increase of

£4.8 billion in IHT receipts in the months between April and November 2022 and as we approach

the end of the tax year, it is more important than ever that people understand the tax, but also, crucially, how they can mitigate any liability.

IHT is undoubtedly complex, and without

the appropriate planning it can be an expensive business.

It is heavily punitive at 40 per cent and whilst the government will not be entirely unhappy at the revenue it is receiving, there are important allowances in place that can ensure any tax liability can be reduced significantly or even removed completely.

The current IHT threshold in the UK is £325,000, a figure that has been frozen for some years. This means estates worth up to this amount are not subject to IHT. Also, there is

a residence nil rate band of £175,000 on top

of this, so a married couple could have around

£1 million in their estates before paying tax.

It should be noted IHT thresholds have now been frozen by the government until 2028 so there is a likelihood more people could well fall into the IHT trap in the coming years.

Pensions can be an ideal way to quickly remove cash from any estate calculations and, depending on your earnings and previous contributions, you could contribute £40,000 per year and even carry forward any unused allowances from the previous three tax years

and pay in up to £160,000.

There is no waiting period, such as the

seven-year rule, on this, but great care must be taken not to breach any annual or lifetime allowances. As the end of this tax year nears,

now would be a good time to assess this as

a viable option.

The use of trusts has also become more common given that it allows the donor to retain an element of control over their assets while still gifting them away. Importantly, they will be treated as a gift for seven years and may fall back into the estate if you die within that period.

Another area that should be under consideration is investing in niche investments which offer business property relief, such as AIM (alternative investment market) portfolios. This of course is not suitable for everyone and with AIM shares carrying more risk this is definitely an option where professional advice is a must.

However, investments that qualify will not be subject to IHT after being held for two years and they are perfect for some individuals because the assets remain in their own name and still allow them to be used if needed. Importantly, any assets removed from the investment and brought back into your estate could be taxable.

A further way to reduce your IHT bill would be to make use of your annual gift allowance, which allows you to gift up to £3,000 per year without incurring IHT. Furthermore, you can make use of your annual exemption, which allows you to make gifts of £250 per person without them being subject to IHT.

Last, but certainly not least, anything donated to a charity in your will reduces your estate immediately by that amount. In addition, if you designate 10 per cent or more of your estate to charity in your will then any remaining IHT

due on the remainder will be taxed at 36% instead of 40%.

Financial planning can be a job in itself and making plans for when you are no longer here can be a sensitive and difficult process.

There are many considerations when it comes to IHT, and the best option is get independent financial advice as early as possible if you want to ensure the assets and wealth you worked hard to build over your lifetime are, as far as is possible, yours to pass on.

Keith Brooks is a chartered financial planner

at Aberdein Considine.