Tips on using your pension to help reduce inheritance tax

Inheritance tax is charged at 40 per cent on the value of an estate that exceeds the nil-rate band of £325,000

More estates are set to face the punishing 40 per cent charge amid rocketing property prices and inflation (PA Archive)

Inheritance tax can eat into the savings you want to pass on to loved ones after you’re gone.

What was once a problem only for the rich, now a growing number of families face paying the eye-watering 40 per cent levy thanks in part to soaring property values.

But there are ways to reduce the impact of inheritance tax (IHT).

The annual cap we are all allowed to bequeath without inheritance tax being due is currently £325,000. There’s also the residence nil rate band of £175,000, but only if you pass a main residence onto a child or grandchild.

Pensions though, are considered to be outside of your estate for IHT purposes, so anything left in your pot can be passed on free of the tax.

And Jeremy Hunt’s decision to remove the lifetime allowance from 6 April means the amount that can be paid into a pension over a lifetime has also increased significantly.

The latest HM Revenue & Customs (HMRC) data revealed IHT receipts for April 2022 to February 2023 are £6.4 billion. This is a record high and £0.9 billion more than in the same period a year earlier.

By 2028, the Office for Budget Responsibility estimates that the freeze on IHT thresholds will mean the Treasury is raking in £458.9 billion by 2028, hitting a quarter of a million estates.

Jason Hollands of the investment platform Bestinvest, told The Telegraph: “Former Labour Chancellor Roy Jenkins famously described IHT as ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue'. This is because with a bit of careful planning, an IHT liability can be reduced or even eliminated entirely.”