Inheritance Tax (IHT) can feel like an unwelcome surprise for families. In the UK, estates valued above the current threshold of £325,000 (£650,000 for married couples or civil partners) may be taxed at 40%. But with careful planning, you can significantly reduce the amount of IHT owed and ensure more of your wealth is passed on to your loved ones.
This guide covers how IHT works, available allowances, and smart planning strategies to minimise your IHT bill.
1. How Inheritance Tax Works
Inheritance Tax is charged on the value of your estate — which includes your property, savings, investments, and possessions — after your death.
- Nil Rate Band (NRB): £325,000 per person
- Residence Nil Rate Band (RNRB): Up to £175,000 extra if you pass your main home to direct descendants (children or grandchildren)
- Standard Rate: 40% on the value of your estate above these allowances
Example:
If your estate is worth £600,000 and you leave it to your children:
- £325,000 is tax-free (NRB)
- £175,000 is tax-free if you qualify for the RNRB
- Remaining £100,000 taxed at 40% = £40,000 IHT bill
2. Key Allowances and Reliefs
Spouse or Civil Partner Exemption
Transfers to your spouse or civil partner are tax-free, regardless of the amount.
Residence Nil Rate Band (RNRB)
Available when leaving your primary residence to direct descendants, adding up to £175,000 per person.
Charitable Donations
Leaving at least 10% of your estate to charity reduces the IHT rate on the rest of your estate from 40% to 36%.
Business and Agricultural Relief
Some business assets and farmland may be 100% exempt from IHT, provided certain conditions are met.
3. Strategies to Minimise Inheritance Tax
A. Use Your Annual Gift Allowances
- £3,000 annual exemption – Give up to £3,000 per year without IHT implications.
- Small gift allowance – Give up to £250 per person per year to unlimited individuals.
- Wedding gifts – £5,000 for a child, £2,500 for a grandchild, £1,000 for others.
B. Make Larger Gifts and Survive Seven Years
Gifts made seven years before death are generally exempt from IHT. This is known as a Potentially Exempt Transfer (PET).
- Survive 3–7 years → Taper relief reduces the tax owed.
- Survive 7+ years → Gift becomes fully tax-free.
C. Use Trusts for Estate Planning
Placing money or assets into a trust can reduce the size of your taxable estate while still allowing you to provide for beneficiaries. Common trust types include:
- Bare trusts – Beneficiaries have immediate rights.
- Discretionary trusts – Trustees decide how assets are distributed.
Note: Trusts can be complex and may have tax implications; seek professional advice.
D. Pension Planning
Defined contribution pensions typically fall outside of your estate for IHT purposes. Leaving unneeded pension funds invested can be a tax-efficient way to pass on wealth.
E. Charitable Donations
As mentioned, gifts to registered charities are IHT-free, and leaving 10% or more of your estate to charity lowers the IHT rate on the remainder to 36%.
F. Spend It
One often-overlooked method: enjoy your money during your lifetime. Thoughtful spending or gifting while alive reduces your estate value, lowering IHT exposure.
4. Example Scenarios
| Estate Value | Tax Without Planning | Tax With Planning (Gifts, Allowances, RNRB) | Potential IHT Saving |
|---|---|---|---|
| £500,000 | £70,000 | £0 | £70,000 |
| £750,000 | £170,000 | £70,000 | £100,000 |
| £1,000,000 | £270,000 | £150,000 | £120,000 |
5. Common Mistakes to Avoid
- Not writing a will – Without one, your estate may be distributed inefficiently.
- Forgetting to review plans – Update your arrangements after life events like marriage, divorce, or property sales.
- Ignoring life insurance – A life policy written “in trust” can help cover IHT bills for your beneficiaries.
- Failing to track gifts – Keep records of all gifts and dates to simplify future IHT calculations.
6. Professional Advice Matters
IHT planning can be complex, especially with larger estates or business assets. A financial planner or solicitor can help you:
- Structure trusts efficiently.
- Use allowances effectively.
- Create a strategy that fits your financial goals.
Final Thoughts
Inheritance Tax doesn’t have to take a huge bite out of your estate. By understanding allowances, gifting rules, and smart planning strategies, you can pass on more of your wealth to the people and causes you care about.
Start planning early, keep good records, and review your strategy regularly — your family will thank you.
