With inheritance tax thresholds frozen and property values continuing to rise, many families are discovering that inheritance tax is no longer only a concern for the very wealthy. Taking advice early can help protect your estate and ensure more of your wealth passes to your loved ones. Good estate planning is about preserving family wealth, reducing unnecessary tax and making life easier for your loved ones after your death. The key is to act early and put practical steps in place while you still have options.
The main inheritance tax rules are explained in more detail below and you will also find steps you can take to reduce the amount of tax your estate may have to pay.
Understanding Inheritance Tax
In the UK, inheritance tax is generally charged at:
- 40% on estates above the available tax-free thresholds
- Tax is usually payable within six months of death
Tax is paid from the estate before beneficiaries receive assets
Who Should Consider Inheritance Tax Planning?
You may benefit from inheritance tax planning if:
- You own property that has significantly increased in value
- Your combined assets exceed £325,000 individually or £650,000 as a couple
- You own a business, farmland, or investment portfolio
- You want to pass wealth to children or grandchildren tax efficiently
- You are concerned about care fees, remarriage, or protecting vulnerable beneficiaries
Current Main Allowances
The Nil Rate Band (NRB), sometimes referred to as a Nil Rate Threshold is currently worth £325,000 per person. There is also the Residence Nil Rate Band (RNRB) which is an additional allowance of up to £175,000 per person which may apply to a person’s estate when there is a main residence passing to the deceased’s direct descendants. The rates are effectively doubled for a married couple (or civil partners) who can potentially pass on £1 million tax free (£325,000 x 2 plus £175,000 x 2).
However, estates above £2 million may begin to lose the RNRB.
Why Inheritance Tax Planning Matters
Without planning, a large portion of family wealth can be lost unnecessarily.
Example
David and Sarah own the following assets:
- Their family home worth £900,000
- They have combined investments worth £500,000
- They have joint savings of £200,000
In total their estate is worth £1.6 million.
After available allowances, roughly £600,000 may still be taxable at 40%. This means that their potential inheritance tax bill could be approximately £240,000.
That is money which could otherwise remain with their children or grandchildren.
The earlier planning starts, the more options become available.
What steps can you take to protect your assets?
- Prepare a Will
This is the foundation of any estate planning and without a valid Will, assets may pass under intestacy rules and valuable inheritance tax planning opportunities can be lost. Further, there is risk of family disputes and in some cases, unmarried partners may receive nothing from the estate.
When preparing your Will, appointing executors to look after your estate is important and you should consider choosing people who are organised, financially responsible and trustworthy.
You should consider appointing a professional Will drafter such as a solicitor who can advise on how to maximise the most out of the available inheritance tax allowances, can advise whether Trust provisions may be appropriate in your circumstances and can explain to you how assets are passed on after your death.
Trusts within a Will can sometimes help protect younger or vulnerable beneficiaries, preserve assets for future generations, or provide additional protection in blended family situations. There’s more information on Trusts later.
It is also important to review your Will regularly, especially following significant life events such as marriage, divorce, births, deaths, retirement, receiving an inheritance, or significant changes to your finances.
Many people also choose to prepare Lasting Powers of Attorney alongside their Will. These documents allow trusted individuals to make decisions regarding finances, property, health, and welfare if you lose mental capacity during your lifetime.
Seeking professional legal advice when preparing or reviewing your Will can help ensure your estate planning arrangements remain effective, tax efficient, and aligned with your wishes.
- Using your lifetime gifting allowance
Individuals can give away up to £3,000 per year free of inheritance tax and if you have not used up your allowance in a previous tax year, you can carry this unused allowance forward by one year.
The Seven-Year Rule
Most gifts become exempt from inheritance tax if you survive for seven years after making the gift. These are known as Potentially Exempt Transfers (PETs).
Below is an example of how you can use your annual allowances and how it could reduce the value of your estate for inheritance tax purposes.
Example
David and Sarah did not make any gifts in the previous tax year. This means that between them they have an unused allowance of £6,000. They intend to make a gift this current tax year to their children. Using their unused allowance and their current allowance, they can gift up to £12,000 between them. This amount is removed from their estate for inheritance tax calculations.
Other allowances for gifts:
You can make as many gifts of up to £250 per person, each tax year, as long as each person receives no more than £250 in that current tax year and you have not used your other allowances (such as the £3,000 annual exemption) on the same person.
Example
You could give your annual allowance of £3,000 to your child or children and then in addition you can gift £250 to each grandchild, £250 to several friends and £250 to neighbours or other relatives.
There is no overall limit on the number of people you can give £250 gifts to.
Gifts from Surplus Income
This is one of the most underused exemptions. If you have excess regular income, you can make regular gifts of this providing they are paid from your income and not your capital and the gifts do not reduce your standard of living.
Example
David receives pension income of £60,000 and his annual spending and living costs are £35,000. David decides to gift £1,500 monthly to his grandchild. If these gifts are recorded accurately and correctly, those gifts, may fall outside of his estate.
3 Considering Trusts
Trusts can play a valuable role in inheritance tax planning, although the rules are more complex than in the past.
Common examples of the different types of trusts include discretionary trusts, life interest trusts, and trusts for vulnerable beneficiaries.
Trusts may help control how wealth is used, can be used to protect vulnerable beneficiaries, could reduce future inheritance tax growth and in some cases can protect assets from divorce or bankruptcy risks.
Trusts might also be used to protect younger beneficiaries from receiving large sums of inheritance at a young age or if there is beneficiary with complex medical or learning needs and they cannot manage their own money.
It is important to note that some Trusts can be technical and may incur tax charges and ongoing reporting to HMRC.
It is recommended to seek professional advice before setting up a Trust in your Will or during your lifetime.
4 Pension Planning and Inheritance Tax
Pensions can play an important role in inheritance tax planning because many pension funds fall outside of your estate for inheritance tax purposes. Reviewing pension nominations regularly can help ensure benefits pass to the intended beneficiaries in the most tax-efficient way.
5 Protecting your Family Home
For many families, the home is the main asset within a deceased’s estate and can sometimes create the largest inheritance tax problem. A common mistake families often make is where parents gift the home to the children and continue to live there rent free.
In this case, the parents have made a “gift with reservation of benefit” which means that the property may still remain part of your estate for inheritance tax. This arrangement if not explained and explored properly can often fail to achieve the intended tax result. It is recommended to seek professional advice before gifting your family home as there are many risks involved.
6 Business Relief and Agricultural Relief
Certain business and agricultural assets may qualify for substantial inheritance tax relief.
Business Relief
Some qualifying business assets can receive between 50% and 100% inheritance tax relief. Potential qualifying assets may include shares in qualifying private companies, certain AIM-listed investments and your own business.
Agricultural Relief
This may reduce inheritance tax by up to 100% on qualifying agricultural property, including farmland, certain farm buildings and in some cases, associated assets. The relief is subject to strict conditions, including how long the property has been owned and how it is used.
These rules are complex and can vary depending on whether the land is farmed directly or let to tenants, and they are regularly reviewed by the government.
If you think your estate may qualify for business and/or agricultural relief, it is recommended to seek professional advice.
7 Take Out Life Insurance to Cover the Tax Bill
Sometimes reducing inheritance tax is unrealistic for some families. In these cases, taking out a life insurance policy can help provide cash so that beneficiaries do not need to sell assets quickly, such as the family home, in order to pay the inheritance tax bill.
8 Other Matters to Consider
Take Practical Steps to Record Information
To help your loved ones after your death and to assist your chosen executors, you should be careful to keep a record of the following:
- A list of assets
- Account details
- Pension information
- Insurance policies
- Records of all gifts made, their value and to whom
- Copies of Wills and whereabouts of the original
Review Your Will and Estate Planning Regularly
Inheritance tax planning should not be done once and forgotten about. Remember that tax rules change frequently and family circumstances change and evolve. You should keep your Will and estate under review in any of the following events or every five years:
- Property value changes
- Marriage or divorce
- Births or deaths
- Retirement
- Business sales
- Receiving inheritance or any change in financial circumstances
Final Thoughts
The goal is not simply to reduce tax. It is to ensure your personal wealth passes smoothly, efficiently and according to your wishes. However, inheritance tax planning can be highly technical and mistakes can have significant financial consequences. Poorly structured gifts, outdated Wills, or incorrect trust arrangements may fail to achieve the intended tax outcome.
Getting professional legal advice can help ensure your estate is structured as efficiently as possible.
The experienced Private Client team at Bridge McFarland Solicitors can provide tailored inheritance tax planning and estate planning advice to help protect your wealth and provide peace of mind for future generations.
To discuss your circumstances or review your existing Will and estate planning arrangements, contact our team today. Call us on 0800 987 8800 or email enquiries@bmcf.co.uk.
