Reducing a £2m Inheritance Tax Bill — A Client Case Study

The client names have been changed for the purpose of this case study.

By Luke Turner, Independent Financial Adviser

Inheritance Tax (IHT) can sometimes be one of the most emotionally and financially frustrating taxes for many families — especially when it could mean a significant portion of your wealth goes to HMRC rather than your children or grandchildren.

Recently, a couple – Mr and Mrs Jones, aged 60 and 61 – came to me with a challenge: their projected IHT bill was over £2 million. Their priority? To reduce this for the sake of their children, without compromising their own retirement plans or lifestyle.

Luke Turner is an Independent Financial Adviser (IFA).

Step 1: Understanding Lifestyle Needs First

Before any recommendations were made, we sat down to discuss how much they needed to live comfortably for the rest of their lives. After several conversations and a deep dive into their expenditure, they agreed on an annual income target of £80,000, with a 10–20% contingency buffer each year to give peace of mind against inflation and unexpected costs.

This process helped us draw a clear line between essential income and surplus capital — which is crucial when structuring tax-efficient IHT planning.

Understanding the lifestyle requirements of clients is an essential step when IHT planning.

Step 2: Cashflow Modelling – How Long Will the Money Last?

Using detailed cashflow modelling, we projected how long their assets would last if they drew £80,000 per year. This allowed us to determine what capital was surplus to their lifestyle needs – the part of their estate that could be safely used for inheritance planning.

With this clarity, we were able to focus on preserving and passing on that surplus, while keeping their retirement income tax-efficient and sustainable.

Step 3: Creating Tax-Efficient Income Streams

We then looked at how to generate that £80,000 in the most tax-efficient way possible. Here’s how we structured it:

• ISA withdrawals – completely tax-free

• Tax-free cash from pensions – Mr Jones took his full 25% lump sum with no tax implications

• Pension income within the personal allowance – using both clients’ allowances to reduce income tax

• Investment bonds – accessed carefully to utilise the 5% tax-deferred withdrawals

• General Investment Account (GIA) – managed to stay within capital gains allowances and harvest gains efficiently

The result? We were able to get extremely close to the £80,000 figure with minimal personal tax liability.

Step 4: Using Trusts to Protect and Reduce the Estate

Anticipating that pensions will fall within IHT from April 2027, should the proposed legislation take effect, we took proactive steps:

• A portion of the surplus funds was placed into a Discounted Gift Trust. This:

  • Provided an immediate reduction in their estate for IHT purposes

  • Paid regular, tax-efficient income back to the couple

  • Allocated a proportion of their savings for future benefit of their children and grandchildren

The trust funds were invested with the aim of achieving returns above inflation over the long term — helping to preserve the real value of the inheritance.

Step 5: Business Relief – Flexibility with Fast IHT Benefits

Another portion of their capital was placed into a Business Relief (BR) portfolio, which offers:

• 100% IHT exemption after just two years

• Access to the funds if needed, unlike many traditional IHT strategies

• A diversified portfolio not directly tied to mainstream market volatility

This strategy can be useful for clients who are concerned about giving money away too soon.

Please note that Business Relief portfolios are considered higher-risk investments and may not be suitable for all investors. These will only be recommended following a full assessment of a client’s circumstances, risk tolerance, and investment experience.

Step 6: Gifting from Surplus Income

Often considered one of the most under-used IHT tools is the “gifting from surplus income” rule.

Mrs Jones had a final salary (defined benefit) pension with guaranteed income. We set up regular gifts from her pension income to children and grandchildren. As these gifts did not impact her standard of living and could be evidenced clearly, they were fully exempt from IHT, regardless of value or timing.

This is a hugely efficient planning strategy, but often overlooked.

Step 7: Whole of Life Cover – Planning for the Inevitable

Finally, we arranged a Whole of Life insurance policy, written in trust, to cover the remaining IHT liability.

Why?

• It ensures a tax-free lump sum is paid out on second death, helping provide funds for beneficiaries to put towards the IHT bill, which may mean they could avoid having to sell assets or wait for probate.

• Premiums are guaranteed for life, making them easy to factor into long-term cashflow.

• It can provide the family certainty: money could be available to cover or put toward the IHT bill, to help protect the estate.

  
  

This can be particularly powerful when combined with other strategies, allowing the family to retain wealth without giving away large sums immediately.

Final Thoughts

The Jones family are now on track to reduce their IHT bill by over £1 million, while maintaining the lifestyle they worked hard for.

Good inheritance tax planning is never about one product or quick fixes. It’s about building a long-term strategy, understanding your lifestyle needs, and layering the right tools — trusts, gifting, BR portfolios, tax-efficient withdrawals, and protection — in the right order.

If you’re concerned about the inheritance tax your loved ones may face, or want to understand your options without giving away control of your money, I’d be happy to help.

Toro Wealth Planning – Helping You Protect and Pass On What Matters Most

Risk Warnings:

This guide and the example client situations provided are for illustrative purposes only and do not constitute personal advice or a recommendation, which should be based on your individual circumstances.

• The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

• Benefits of insurance products will be put at risk or cease altogether if premium payments are not maintained.

• HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

• Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of cash flow, inheritance tax, estate, trust or tax planning