Inheritance Tax Planning: A Guide for UK Residents

As UK residents, understanding inheritance tax (IHT) and planning ahead is crucial in ensuring that your loved ones can benefit as much as possible from their inheritance. With the right strategies, you can minimize the tax burden and ensure that your estate is passed on according to your wishes.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who’s passed away. The standard IHT rate is 40%, charged only on the portion of your estate that is above the nil-rate band, which is currently set at £325,000 for the 2025/26 tax year. Any value above this threshold is potentially subject to IHT, although there are various reliefs and exemptions that can reduce this liability.

Understanding Key Terms and Conditions

To begin with, it’s important to understand terms such as the nil-rate band (NRB), which everyone is entitled to, as well as the residence nil-rate band (RNRB), an additional threshold available if you pass your home to your children or grandchildren. This can bring your IHT-exempt threshold up to £500,000 if conditions are met.

Essential Tips for Inheritance Tax Planning

Make a Will

One of the simplest yet most effective ways to manage how your estate will be distributed is by making a will. Without one, your estate may not be shared according to your wishes and could lead to higher IHT costs. For advice on drafting a will properly, consider consulting with a professional from Citizens Advice.

Gift Wisely

Giving gifts during your lifetime can be a great way to reduce your IHT liability. You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’. Small gifts up to £250 per person are also exempt, as well as gifts for weddings and civil partnerships (up to a certain amount).

Consider Trusts

Trusts can be an excellent tool for estate planning, allowing control over how your assets are used after you pass away. They can also sometimes help in reducing the IHT liability. This is a complex area, so it’s advisable to seek advice from specialists like those at STEP (Society of Trust and Estate Practitioners).

Invest in IHT-efficient Investments

Some types of investment are eligible for IHT relief, such as shares in qualifying AIM-listed companies or certain types of enterprise investment schemes. These options can be risky, so it’s important to consult with a financial advisor from an established organization like Hargreaves Lansdown before committing.

Utilize Pensions

Pensions can be efficient for IHT planning. Money within a pension can usually be passed on free from IHT, depending on the provider’s rules and when you die. Make sure your pension provider has up-to-date details of your intended beneficiaries.

Purchase Life Insurance

A life insurance policy written in trust can pay out directly to your beneficiaries without being counted as part of your estate for IHT purposes. This can be a straightforward way to provide for a tax-free lump sum on death, helping to cover any IHT bills.

Seek Professional Advice

While there are many steps you can take yourself to plan for IHT, the rules can be complex and change over time. It’s often worth consulting with an IHT planning specialist to tailor a plan that’s right for you and your family’s needs. Firms such as PwC UK can offer targeted advice and planning services.

Conclusion

Effective inheritance tax planning can save your family significant amounts of money and stress in the long run. By understanding the rules, making wise decisions about gifting, investing, and trusts, and ensuring your will is up to date, you can ensure that your loved ones make the most out of their inheritance.