Inheritance Tax Planning in the UK: A Detailed Guide for 2025

Inheritance tax (IHT) in the UK often feels like a daunting prospect for many. As of 2025, if your estate is worth more than £325,000, it may be liable for IHT at a rate of 40%. Planning ahead can help reduce the burden on your loved ones and ensure more of your estate goes where you intend.

Understand Your IHT Allowance

The threshold for IHT, also known as the ‘nil-rate band’, remains at £325,000 in 2025. Anything above this amount is taxed at 40%, unless you leave something to your spouse or civil partner, or a charity, which are typically exempt from IHT. Learn more about IHT allowances on the official UK government website.

Make Use of the Residence Nil-Rate Band (RNRB)

Introduced a few years ago, the RNRB allows an additional allowance when the family home is passed on to direct descendants. As of 2025, the RNRB stands at £175,000 per person. This can be combined with the standard nil-rate band, potentially allowing couples to pass on up to £1 million tax-free. It’s intricate, so if you want detailed mechanisms on how RNRB works, the UK government guidance is a valuable resource.

Gifts and Taper Relief

Gifting assets during your lifetime is a tool for IHT planning. You can give away up to £3,000 annually without this gift being added to the value of your estate for IHT purposes. Moreover, if you survive for seven years after making a larger gift, it typically falls outside of your estate for IHT calculations, known as ‘taper relief’. There are various nuances to these rules, so it’s wise to maintain records of all such gifts.

Consider Trusts

Setting up a trust can be an effective way to manage how your assets are passed on to your beneficiaries while minimizing IHT liabilities. Trusts are particularly useful if you wish to set aside assets for minors or control the distribution of your estate over time. Setting up a trust can be complex, hence consulting a professional, such as those at Society of Trust and Estate Practitioners (STEP), can provide guidance tailored to your situation.

Take Out Life Insurance

Life insurance isn’t included in your estate for IHT purposes if written in trust. This means you can potentially provide a sum towards any IHT bill on your death, without increasing the IHT liability. It’s advisable to consult with life insurance experts to find appropriate policies, and companies like Compare the Market offer information and comparisons on various life insurance options.

Business Relief

If you own a business, you might be able to take advantage of Business Relief, which can reduce the value of your business or its assets when it comes to calculating IHT. This relief can be as high as 100% on some assets, making it a significant area of potential tax saving.

Keep Your Will Up-to-Date

An up-to-date will is crucial in inheritance planning. It ensures your assets are distributed according to your wishes and can help in mitigating potential disputes and confusion among beneficiaries. Utilizing the services of legal professionals for drafting and updating your will can be essential. Platforms such as The Law Society offer directories of solicitors specialising in wills and probate.

Conclusion

Inheritance tax planning is intricate and requires thoughtful consideration and often, professional advice. By taking proactive steps today, you can ensure that your assets are passed on to your loved ones as seamlessly as possible, minimizing their future tax burden. Remember, the earlier you start planning, the more options you will have available to ensure your legacy is preserved in the manner you wish.