Inheritance tax planning guide

IHT is a tax that may be payable on the value of someone’s estate when they die, subject to various exemptions, allowances and reliefs. The standard rate of IHT is currently 40%, although not every UK estate will be liable. The amount of tax payable depends on the value of the estate, available exemptions and reliefs, gifts made during the person’s lifetime and other circumstances.

Your estate can include:

• your home and other property;
• bank and savings accounts;
• investments and shares;
• business interests;
• personal possessions;
• certain trusts and other assets;
• certain lifetime gifts;
• from 6 April 2027, most unused pension funds and pension death benefits will also generally be brought within the IHT estate.

There is currently a nil-rate band (NRB) of £325,000. Broadly, this means that IHT is not payable on the first £325,000 of your estate, subject to the detailed rules and taking account of certain lifetime gifts. This amount has not changed since 2008, and the government has announced that the £325,000 threshold will remain frozen until 5 April 2031.

There is also a residence nil-rate band (RNRB) of up to £175,000 where the relevant conditions are met. Broadly, this can apply where a property you live in is inherited by direct descendants, and the total estate is worth £2 million or less.

This means that, in the right circumstances, an individual may potentially have up to £500,000 of available nil-rate bands.

For a married couple or civil partners, unused NRB and RNRB may potentially be transferred to the surviving spouse or civil partner, meaning a couple could potentially have up to £1 million of combined allowances available on the second death.

One of the most significant IHT exemptions is the spouse or civil partner exemption as generally, transfers between spouses and civil partners are exempt from IHT. This can mean that assets passing from one spouse to the other on death do not give rise to an IHT charge at that point.

Unmarried couples do not benefit from this exemption simply because they have lived together for many years or have children together. A Will can make provision for an unmarried partner, but it does not give that partner, the spouse or civil partner IHT exemption.

Marriage can also provide important inheritance protections beyond IHT, including automatic rights for a surviving spouse or civil partner under the intestacy rules.

One of the most straightforward ways of reducing the value of an estate can be to make gifts during your lifetime.

However, gifting is not simply a case of giving assets away and immediately removing them from your estate.

Many lifetime gifts are known as potentially exempt transfers. Broadly, if you survive for seven years after making an outright gift to another individual, the gift becomes exempt from IHT, but if you die within seven years, the gift may still be taken into account when calculating IHT. This means that lifetime gifting needs to be considered as part of your overall estate plan, rather than viewed as a simple seven-year countdown.

Certain business and agricultural assets may qualify for specific IHT reliefs, potentially reducing or eliminating the IHT payable on qualifying assets.

These reliefs are subject to detailed conditions and business and agricultural property planning should therefore be reviewed carefully rather than assuming that an asset will automatically qualify for relief.

Pensions have historically played an important role in estate planning because certain pension benefits could fall outside the IHT estate. However, from 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of an individual’s estate for IHT purposes. In general, death-in-service benefits payable by your employer if you die whilst still employed will not be included in your IHT estate.

This means that pension arrangements should form part of a wider estate planning review, particularly for people with substantial pension savings.

Gifts to qualifying charities are generally exempt from IHT.

There can also be an additional tax benefit where at least 10% of the relevant net estate is left to charity: the rate of IHT can be reduced from 40% to 36% on the relevant taxable estate.

For people who already intend to leave money to charity, careful Will planning can therefore have both philanthropic and tax benefits.

Trusts can be a useful tool in IHT planning as they can allow individuals to transfer assets out of their estate, depending on the type of trust and the circumstances, potentially reducing the value of their estate for IHT purposes. They can also provide greater control over how and when assets are passed to beneficiaries, which can be particularly useful when planning for future generations. However, the IHT treatment of trusts can be complex, with potential tax charges arising when assets are transferred into, held within, or distributed from a trust, so careful planning and professional advice are important.

IHT planning should not be treated as a one-off exercise. Your circumstances can change because of:

• changes in the value of your assets;
• marriage, civil partnership or divorce;
• births and deaths in the family;
• business ownership;
• gifts made during your lifetime;
• changes to your pension arrangements;
• moving home;
• changes in tax legislation.

The forthcoming pension changes from April 2027 are a good example of why existing estate plans should be reviewed rather than assumed to remain appropriate.

It is also important to keep clear records of lifetime gifts, including what was given, to whom, when and its value. This can make administering your estate considerably easier.

Good IHT planning is not simply about reducing a tax bill. It is about making sure your assets are structured in a way that reflects your wishes, while allowing you and your family to make informed decisions about wealth during your lifetime and after your death.

The earlier you review your estate, the more options you may have available. A properly drafted Will, considered lifetime gifting, and regular reviews of your assets and circumstances can all form part of an effective estate planning strategy.