Inheritance Tax planning: how to pass on more of your wealth

Inheritance Tax is sometimes described as a “voluntary tax” because careful planning may reduce the amount ultimately paid by an estate.

That description should be treated with caution.

Inheritance Tax cannot always be avoided, and reducing it often requires people to make important decisions about gifting, investing, trusts and control of their assets. The most tax-efficient option will not necessarily be the most appropriate one for you or your family.

The central challenge is therefore not simply how to pay less tax. It is how to pass wealth to the people and causes you care about without leaving yourself financially vulnerable.

Starting early can provide more options, but any plan should be based on a realistic assessment of your future income, spending, health, family circumstances and need for access to capital.

What is Inheritance Tax?

Inheritance Tax, usually shortened to IHT, is a tax that may be charged on a person’s estate when they die.

The estate can include: property, savings and cash, investments, businesses and company shares, valuable possessions, as well as certain trusts, overseas assets, and some gifts made during the person’s lifetime.

Debts and certain allowable expenses can generally be deducted when calculating the estate’s value.

The standard rate of Inheritance Tax is 40%. It normally applies only to the part of an estate exceeding the available tax-free thresholds after exemptions and reliefs have been considered. A reduced rate of 36% may apply to some assets where at least 10% of the estate’s relevant net value is left to charity.

Inheritance Tax Thresholds Explained

Every individual potentially has a basic tax-free allowance known as the nil-rate band.

The nil-rate band is currently £325,000. It is due to remain at that level until 5 April 2031.

Where the estate exceeds the available nil-rate band, Inheritance Tax may be charged on the excess.

For example, if a taxable estate is worth £625,000 and only the £325,000 nil-rate band is available, the potential taxable amount would be £300,000. At 40%, this could produce an Inheritance Tax liability of £120,000, subject to any other exemptions, deductions or reliefs.

The calculation may be considerably more complicated where the estate includes lifetime gifts, trusts, business assets, pensions or property passing to a spouse.

Inheritance Tax for Married Couples and Civil Partners

Assets left to a UK-qualified spouse or civil partner are normally exempt from Inheritance Tax.

Where the first person to die does not use all of their nil-rate band, the unused percentage can usually be transferred to the surviving spouse or civil partner’s estate.

This can potentially provide a married couple or civil partners with a combined basic nil-rate band of up to £650,000 on the second death.

The transferable allowance is based on the unused percentage rather than simply transferring a fixed cash amount. This distinction may matter where thresholds change over time.

The spouse exemption and transferable allowances do not generally apply in the same way to unmarried partners, regardless of how long the couple has lived together. This makes wills, ownership arrangements and life assurance particularly important for cohabiting couples.

What Is the Residence Nil-Rate Band?

An additional allowance known as the residence nil-rate band may be available when a qualifying home is left to direct descendants.

Direct descendants can include children, adopted children, stepchildren, foster children and grandchildren.

The residence nil-rate band is currently up to £175,000 per person. When added to the £325,000 standard nil-rate band, it can potentially allow an individual to pass on up to £500,000 free from Inheritance Tax.

A qualifying married couple or civil partners may therefore be able to pass on as much as £1 million before Inheritance Tax becomes payable.

However, the full £1 million is not an automatic allowance for every couple.

The residence nil-rate band is subject to several conditions. It may be reduced where:

• there is no qualifying home;
• the home is not left to direct descendants;
• the estate is worth more than £2 million; or
• the available allowance has already been used.

For estates valued above £2 million, the residence nil-rate band is reduced by £1 for every £2 by which the estate exceeds that threshold.

This can result in larger estates losing some or all of the additional residence allowance.

Special rules may preserve the relief where someone has downsized or sold their home, provided qualifying assets are left to direct descendants. Specialist advice may be required to establish whether these provisions apply.

Why Frozen Inheritance Tax Thresholds Matter

The main Inheritance Tax thresholds have remained unchanged for many years and are now scheduled to remain fixed until April 2031.

When property and investment values rise while tax thresholds remain static, more estates can be drawn into the Inheritance Tax system even where families do not consider themselves exceptionally wealthy.

A person who previously expected their estate to fall below the threshold may therefore find that increases in the value of their home, pension or investments have changed their position.

Regular estate valuations can help identify a potential liability before it becomes an urgent issue.

Giving Money Away During Your Lifetime

Before making a substantial gift, consider whether you can afford it and whether you might need the money later. Think about the recipient’s age and financial maturity, as well as the possibility of divorce, bankruptcy or family disagreement. You should also consider whether Capital Gains Tax could arise, whether the gift could affect eligibility for care funding, and how it will be recorded.

Tax efficiency should not come at the expense of your own financial security.

Annual Inheritance Tax Gift Allowance Explained

An individual can generally give away up to £3,000 each tax year using the annual Inheritance Tax exemption.

Where the previous year’s exemption was not fully used, the unused amount may usually be carried forward for one tax year only. The current year’s exemption must normally be used first.

This means that someone who made no qualifying gifts in the previous tax year could potentially give away £6,000 using the annual exemptions.

A couple could potentially give £12,000 between them where both have the current and previous year’s full exemptions available.

It is important to keep accurate records showing what was given and who received it, as well as the date of the gift and which exemption was used.

Small gifts and wedding gift exemptions

You can generally make small gifts of up to £250 per person during a tax year, provided you have not used another exemption for the same recipient.

Wedding or civil-partnership gifts may also be exempt within specified limits:

• up to £5,000 to a child;
• up to £2,500 to a grandchild or great-grandchild; and
• up to £1,000 to another person.

The gift must be made on or shortly before the wedding or civil partnership ceremony to qualify.

Certain gifts to charities, political parties and qualifying organisations can also be exempt from Inheritance Tax.

Regular gifts from surplus income

One of the most valuable but frequently overlooked exemptions is for normal expenditure out of income.

Regular gifts may be immediately exempt from Inheritance Tax where they form part of your normal pattern of expenditure, when they are made from income rather than capital, and where they leave you with enough income to maintain your usual standard of living.

This exemption does not have a fixed monetary ceiling.

It can potentially be used to help with children’s or grandchildren’s school fees, pension contributions for family members, regular savings or investment contributions, insurance premiums, rent or mortgage support, and other recurring family expenses.

The exemption is highly dependent on evidence.

You should keep detailed records of your income, normal expenditure and gifts. Executors may need to demonstrate to HMRC that the conditions were met after your death.

A series of irregular capital gifts will not necessarily qualify merely because they were made over several years.

The seven-year rule explained

A gift made directly to another individual that is not covered by an immediate exemption will normally be treated as a potentially exempt transfer.

If the person making the gift survives for seven years, the gift will generally fall outside their estate for Inheritance Tax purposes.

If they die within seven years, some or all of the gift may be brought back into the Inheritance Tax calculation.

The way tax is calculated can be misunderstood.

Taper relief may reduce the tax payable on a gift where death occurs between three and seven years after it was made. It does not reduce the value of the gift itself.

There may be no taper relief benefit where the total gifts remain within the nil-rate band, because no tax is directly attributable to the gift.

Gifts made within seven years of one another can also interact, so the order and timing of gifts matter.

Do not continue benefiting from an asset you have given away

A gift may remain within your estate if you continue to use or benefit from the asset.

This is known as a gift with reservation of benefit.

A common example is giving your home to your children but continuing to live there rent-free. Although legal ownership has changed, HMRC may continue to treat the property as part of your estate.

Similar issues can arise where someone gives away an investment but keeps the income, transfers a holiday home but continues using it freely, gives away valuable possessions while retaining control of them, or transfers assets into an arrangement from which they can still benefit.

Some arrangements can also create an income tax charge under the pre-owned asset rules.

Giving away a home or other major asset should never be undertaken without specialist legal and tax advice.

Trusts and Inheritance Tax Explained

Trusts can help families control how and when assets are used.

For example, a trust might be considered where:

• beneficiaries are young;
• a beneficiary is financially inexperienced;
• there are concerns about divorce or bankruptcy;
• the family includes children from previous relationships;
• a beneficiary has additional care needs;
• the person making the gift wants trustees to retain discretion; or
• assets need to be managed across generations.

However, a trust is not simply a tax-free container.

Depending on the structure and value involved, transferring assets into a trust may create an immediate Inheritance Tax charge. Trusts can also face periodic charges, exit charges, Income Tax and Capital Gains Tax.

Different trust structures provide different levels of access, control and certainty.

Once assets have been transferred, the person establishing the trust may be unable to recover them. The legal, tax and administrative consequences should therefore be fully understood before proceeding.

Trust planning normally requires advice from a solicitor, tax specialist and financial planner working together.

Life insurance and Inheritance Tax Explained

Life insurance does not reduce the value of an estate or eliminate the tax liability.

Instead, it can provide money with which beneficiaries or executors can pay the bill.

A whole-of-life policy may be arranged to produce a payment on death. Couples sometimes use a joint-life, second-death policy intended to pay after both have died, when the Inheritance Tax liability may arise.

The policy will generally need to be written in an appropriate trust if the proceeds are to remain outside the insured person’s estate and become available without waiting for probate.

The potential advantages include:

• providing liquidity to pay the tax;
• avoiding a forced sale of property or investments;
• creating greater certainty for beneficiaries; and
• preserving other assets for the family.

However, premiums can be substantial, particularly where cover is arranged later in life or where there are health issues.

The policy should be reviewed periodically to ensure the cover remains appropriate and affordable.

Business Property Relief (BPR) and Agricultural Property Relief (APR)

Certain qualifying business and agricultural assets may receive relief from Inheritance Tax.

The rules changed substantially from 6 April 2026.

A combined allowance of £2.5 million now applies to assets qualifying for 100% Business Property Relief or Agricultural Property Relief. Qualifying value above that allowance generally receives relief at 50%.

Any unused part of the £2.5 million allowance can potentially be transferred to a surviving spouse or civil partner. This could allow a couple to obtain 100% relief on up to £5 million of qualifying business or agricultural property, in addition to other available Inheritance Tax allowances.

Not every company, investment or piece of land qualifies.

Business Relief may be restricted or unavailable for businesses mainly involved in dealing in shares, securities, land, buildings or investments. Minimum ownership periods and other detailed conditions normally apply.

From 6 April 2026, certain shares traded on designated markets that were previously eligible for 100% Business Relief receive relief at 50%.

Investing in qualifying business assets purely to reduce Inheritance Tax can expose investors to significant risks, including:

• loss of capital;
• limited diversification;
• difficulty selling the investment;
• changes in tax rules;
• the company ceasing to qualify; and
• the investment being unsuitable for the investor’s wider objectives.

Tax relief should be viewed as a potential benefit of an otherwise suitable investment—not as a substitute for proper investment analysis.

How Pension Rules Are Changing for Inheritance Tax

Pensions have historically played an important part in estate planning because many unused pension funds could pass outside the estate for Inheritance Tax purposes.

This is changing.

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of the deceased person’s estate when calculating Inheritance Tax. Death-in-service benefits from registered pension schemes are expected to remain excluded.

This change may materially affect people who have deliberately preserved pension wealth while spending other assets. It may also affect the order in which retirement assets are withdrawn, lifetime gifting plans, life assurance requirements, beneficiary nominations, estate liquidity and the overall tax suffered by pension beneficiaries.

The rules applying to income tax on inherited pension benefits are separate from Inheritance Tax and may depend on the deceased person’s age and the form in which benefits are taken.

Anyone whose estate plan relies heavily on leaving an untouched pension should review their position before the new rules take effect.

Leaving Money to Charity and Reducing Inheritance Tax

Gifts to qualifying charities are generally exempt from Inheritance Tax.

Where at least 10% of the relevant net estate is left to charity, the rate charged on some of the remaining taxable estate may fall from 40% to 36%.

This can sometimes mean that increasing a charitable gift costs the other beneficiaries less than might initially be expected.

The calculation is technical, particularly where an estate contains trusts, jointly owned assets or different components. Professional advice can help determine the effect of a charitable legacy.

Charitable giving should, however, reflect the individual’s genuine intentions rather than being driven solely by tax.

Why You Should Review Your Will Regularly

A valid and up-to-date will is central to effective estate planning. It can help ensure that assets pass to the intended beneficiaries, appropriate executors are appointed, guardians are nominated for minor children, charitable gifts are recorded, trusts are established where appropriate, and available tax exemptions and allowances are used effectively.

A will should be reviewed after major life events such as marriage or civil partnership, divorce or separation, the birth of children or grandchildren, bereavement, a business sale, a substantial inheritance, moving abroad, a significant change in wealth, or changes to tax legislation.

Marriage can revoke an existing will unless it was prepared in contemplation of that marriage. Divorce can also alter the way provisions involving a former spouse operate.

A solicitor should advise on the legal effect of any change in circumstances.

Consider powers of attorney as well as your will

A will determines what happens after death. It does not help if you lose the ability to manage your affairs during your lifetime.

Lasting powers of attorney can allow trusted people to make decisions on your behalf.

There are separate arrangements covering property and financial affairs and health and welfare.

Putting these documents in place can make it easier for family members to manage investments, pay bills, arrange care or deal with property if you become unable to do so yourself.

Inheritance Tax planning should therefore form part of a broader succession and incapacity plan rather than being considered in isolation.

Should You Give Away Your Wealth Early?

Reducing an expected tax bill can be satisfying, but it should not become the dominant objective.

You may need capital for:

• retirement income;
• home maintenance;
• medical or care costs;
• helping family members at a later stage;
• periods of high inflation;
• investment market falls; or
• other unforeseen expenses.

Once an outright gift has been made, you cannot assume that the recipient will return the money if your circumstances change.

Financial modelling can estimate how much you are likely to need under a range of scenarios. This can help distinguish between capital that may genuinely be surplus and assets that should remain available for your own security.

Questions to ask when reviewing your estate

A useful Inheritance Tax review might consider:

• What is the current value of my worldwide estate?
• Which allowances and exemptions are likely to be available?
• Is my will up to date?
• Have I used the correct ownership arrangements?
• Could the residence nil-rate band be restricted?
• Have previous lifetime gifts been recorded?
• Can I afford to make further gifts?
• Do I have surplus income that could be gifted regularly?
• Are trusts appropriate for any beneficiaries?
• Does my estate include qualifying business or agricultural assets?
• How will the 2027 pension changes affect my plan?
• Will my executors have enough cash to pay any tax due?
• Is life assurance appropriate?
• Have I put lasting powers of attorney in place?
• Does my family understand my intentions?

How a Wealth Manager Can Help with Inheritance Tax Planning

Choosing an adviser for estate planning

When comparing wealth managers, ask how much estate-planning work they undertake, whether they provide detailed cash-flow modelling, and how they work with solicitors and accountants. Find out whether they advise on trusts or refer this work to specialists, how investment risk will be assessed, and whether proposed investments rely on maintaining tax relief.

You should also understand how the wealth manager charges, who will provide the ongoing advice, and how often the plan will be reviewed.

Inheritance Tax planning is not a one-off exercise. Asset values, family circumstances and tax rules change, so the strategy may need to evolve.

Inheritance Tax Planning Starts with Your Financial Goals

There are legitimate ways to reduce an Inheritance Tax liability, but each has consequences.

Gifting means giving up ownership. Trusts involve legal and administrative complexity. Life assurance requires ongoing premiums. Business-relief investments can carry substantial risk. Retaining assets may preserve flexibility but leave the estate with a larger tax bill.

The right plan begins with what you want your wealth to achieve.

That may mean providing for a spouse, helping children during your lifetime, protecting vulnerable beneficiaries, supporting charity or preserving a family business.

Once those objectives are clear, your advisers can assess which combination of gifting, investment, insurance and legal planning is appropriate.

Findawealthmanager.com helps individuals compare and meet wealth managers experienced in estate and Inheritance Tax planning. Our matching service is free to use and there is no obligation to proceed with any firm.

Important information

This article is provided for general information only and does not constitute financial, investment, legal or tax advice.

Inheritance Tax treatment depends on individual circumstances and tax rules may change. Trusts, lifetime gifts, pensions, business assets and agricultural property can involve particularly complex rules. Advice should be obtained from appropriately qualified financial, legal and tax professionals before taking action.

The value of investments can fall as well as rise, and you may receive back less than you invest. Eligibility for tax relief is not guaranteed and may be lost if the investment or the investor’s circumstances cease to meet the relevant conditions.