Spending it: the IHT strategy hiding in plain sight
Every pound you enjoy is taxed at 0% instead of 40%. Why underspending is the most common estate problem.
Here is the strangest fact in inheritance tax planning: the most common cause of large IHT bills isn't wealth. It's caution.
Decades of prudence — the same habits that built the estate — don't switch off at retirement. People who could comfortably spend £60,000 a year live on £35,000, not because they want to, but because they don't know they can afford more. The surplus compounds quietly for twenty years, and the reward for a lifetime of restraint is a 40% tax bill on the money they were too careful to enjoy.
Spending isn't really a "strategy" you implement. It's a permission you earn by understanding your numbers.
The maths of enjoying your money
Every pound spent on your own life — travel, the kitchen you've put off, help around the house, experiences with grandchildren — costs your estate 60p in real terms, because the alternative was HMRC taking 40p of it anyway. Framed properly: everything you enjoy is permanently 40% off.
This is not an argument for recklessness. It's an argument for precision — knowing the difference between the capital you genuinely need (with a healthy margin) and the capital that has silently become surplus.
Cashflow planning: the tool that creates permission
Lifetime cashflow planning is a projection of your income, spending, and capital, year by year, to beyond age 100, stress-tested for bad markets, inflation and care costs. It's the single most valuable exercise in retirement and estate planning, because it converts a vague anxiety ("will we run out?") into a concrete answer ("even spending £15,000 a year more, with five years of care costs at the end, you never fall below £400,000").
For many couples, seeing that chart is a genuinely emotional moment. It's the first time anyone has shown them they've already won the game — and that the remaining question isn't accumulation but what the money is for.
The order you spend matters enormously
Once you're spending more, which pot you spend from becomes a tax decision:
The old logic (pre-2027): spend ISAs and savings first, preserve pensions to the end, because pensions sat outside the estate for IHT. Entire retirement plans were built on this sequencing.
The new logic (from April 2027): unused pensions are due to come inside the estate for IHT — and inherited pension withdrawals can also suffer income tax in the beneficiary's hands. For estates over the allowances, an untouched pension may become one of the worst assets to die with, potentially taxed twice. Drawing pension income earlier — to spend, or to gift as regular surplus income — moves from tax mistake to tax strategy for many families.
Sequencing also interacts with capital gains tax: assets with large built-in gains still receive a CGT-free uplift on death, so there's a case for spending cash and pensions while letting pregnant gains pass through the estate. This is exactly the kind of interaction where the sums need doing properly.
Spending's near cousin: converting capital to income
An annuity — handing an insurer a lump sum in exchange for guaranteed income for life — is, in estate planning terms, a form of structured spending. The capital leaves your estate immediately; what you receive is income to live on (or give away under the surplus income exemption). For someone in their late 70s with more capital than they'll use and no desire to manage investments, annuitising a slice can simultaneously simplify life, raise spending confidence, and shrink the estate. The obvious trade-off: the capital is gone, and early death means poor value unless guarantees are built in.
The two guardrails
Care costs are the reason for margins. Quality residential care in the North East can run to £1,500+ a week, and several years of it is entirely possible. A spending plan without a care contingency isn't a plan; it's a hope. Cashflow modelling should always include a late-life care scenario before declaring any capital "surplus."
Deprivation of assets is the line you can't cross. Spending and gifting to avoid care fees — as opposed to general estate planning while in good health — can be unwound by local authorities, who can assess you as still owning what you gave away. Motivation and timing matter; this is another reason planning early, while care is a distant hypothetical, is so much safer than planning late.
The reframe
The best estate plans start with a question that has nothing to do with tax: what is this money actually for? Usually the honest answer is some mixture of security, experiences, and helping family — in that order. Spending addresses the first two directly, and often reveals that the third is affordable sooner than anyone thought. Tax efficiency follows the purpose, not the other way round.
This article is for general education only and isn't personal advice. If you suspect you're underspending but don't know your numbers, a cashflow planning exercise is where to start — get in touch.
Related in this series
If reading this raised a question about your own situation, get in touch.
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