Understanding Inheritance Tax Planning in the UK

Inheritance Tax (IHT) in the UK can be a significant concern for many families, especially as property values and total assets increase and potentially push estates over the IHT threshold. As of 2025, planning how to manage or mitigate the effect of IHT is more important than ever. This article will guide you through some essential strategies and actionable tips for inheritance tax planning unique to the UK context.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who’s passed away. As of 2025, the standard threshold for IHT remains at £325,000, which means if an individual’s estate is valued over this amount, the beneficiaries might need to pay tax at 40% on the excess when the person dies.

Understanding the Residence Nil Rate Band (RNRB)

The Residence Nil Rate Band is an additional threshold introduced a few years ago. It provides an extra allowance to use against the value of the home, provided the residence is passed to direct descendants. In 2025, the RNRB stands at £175,000, which can significantly increase the threshold before IHT applies if you meet the criteria.

For more information, see the official HMRC guidance on Inheritance Tax thresholds and interest rates.

Consider Gifting Assets

One effective way to manage potential IHT is through gifting. Individuals can gift up to £3,000 a year without it being added to the value of their estate. You can also carry forward any unused part of the £3,000 exemption to the following tax year. Larger amounts can potentially be classed as potentially exempt transfers (PETs), which can become exempt from IHT if you survive for seven years after making the gift.

Using Trusts for Inheritance Tax Planning

Trusts can be a beneficial way to control and protect assets, ensuring they go to the right people at the right time without incurring significant taxes. Different types of trusts can be used, such as discretionary trusts, where the trustees have full control over how and when the assets are distributed among the beneficiaries.

Professional advice is crucial when setting up trusts. Consult with experts such as STEP (Society of Trust and Estate Practitioners) for guidance specific to your situation.

Invest in IHT-efficient Investments

Some investments come with IHT benefits, such as investments in AIM shares or Enterprise Investment Schemes (EIS). These are considered outside of your estate for IHT purposes if held for a minimum of two years. Considering the risks associated with these types of investments, professional advice from financial experts like those at Hargreaves Lansdown or Brewin Dolphin can prove invaluable.

Get a Professional Valuation of Your Estate

Understanding the exact value of your estate is essential for effective IHT planning. This valuation will form the basis for your planning strategies. Valuations should be performed regularly as asset values fluctuate.

Life Insurance as an IHT Planning Tool

Setting up a life insurance policy written in trust can pay out direct to beneficiaries without being part of the estate, thus not subject to IHT. This can provide funds to help beneficiaries cover any IHT liabilities. Consulting with insurance providers like Aviva or Legal & General can help you set up the appropriate policies.

Keep Your Will Up-to-date

Last but not least, ensure your will is current and reflects your wishes. Changes in circumstances, such as marriage, divorce, or having children, can affect how you want your estate to be handled. An up-to-date will can help prevent uncertainties and ensure that your estate planning strategies are executed as intended.

Inheritance tax planning can be complex, but with careful planning and professional guidance, you can ensure that your estate is passed on to your loved ones in the most tax-efficient manner possible. Always seek professional advice tailored to your unique circumstances.