Inheritance Tax Planning: A Guide for the UK

Inheritance tax (IHT) in the UK can be a significant financial issue for many families. As of 2025, IHT remains a hot topic, with rates and thresholds that can deeply impact your estate planning. Understanding how to navigate these waters can mean the difference between leaving your heirs a legacy or a hefty tax bill.

Understanding Inheritance Tax

Inheritance tax in the UK is levied on estates that are valued over the current threshold of £325,000 (known as the nil-rate band). The rate for IHT is typically 40% on amounts over this threshold. However, planning your estate effectively can significantly reduce this burden.

Make Use of Gift Allowances

One of the simplest ways to reduce your inheritance tax liability is by making use of gift allowances. In 2025, UK residents can give away up to £3,000 per year tax-free. This is known as the annual exemption. Additionally, small gifts of up to £250 per person per year are not counted towards the IHT. Furthermore, consider larger tax-free gifts for weddings or civil partnerships – £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.

Consider Potentially Exempt Transfers (PETs)

If you make a gift that exceeds these allowances, it could still be exempt from tax as a Potentially Exempt Transfer if you live for another seven years after making the gift. However, if you don’t survive the seven years, the gift will be subject to IHT on a sliding scale depending on how many years you survive post-gift.

Utilise Trusts

Trusts can be an excellent tool for managing how your assets are distributed upon your death, and they can also help minimize IHT. Different types of trusts, such as discretionary trusts or life interest trusts, could be suitable depending on your situation. Consulting a professional financial advisor can provide tailored advice for using trusts as part of your inheritance tax planning.

Secure Your Residence Relief

If you’re leaving your home to your direct descendants, such as children or grandchildren, make sure you take advantage of the residence nil-rate band (RNRB). In 2025, this provides an additional threshold of £175,000 under certain conditions. This means a combined threshold can go up to £500,000, or £1 million for couples, significantly decreasing the taxable amount.

Plan Your Pension

Pensions are usually outside the scope of inheritance tax, making them a potent tool in estate planning. Ensure your pension is set up to pass outside of your estate and check the beneficiary nominations to confirm they are up-to-date. This planning aspect is crucial, and setting up a consultation with a pension specialist can help.

Consider Life Insurance

While life insurance does not reduce IHT per se, a policy written in trust can help cover any IHT liability. This means your heirs are not forced to sell parts of the estate to cover the tax bill. Ensure the life insurance policy is written in trust to keep it outside of the estate for IHT purposes.

Summary

Effective inheritance tax planning requires a combination of understanding current legislation, utilizing allowances and reliefs, and careful financial planning. By considering each aspect and potentially consulting with financial advisers, you can ensure that your heirs can benefit most from their inheritance.

Remember, while it’s possible to handle some aspects of inheritance tax planning on your own, the complexity of the field often makes it beneficial to seek professional advice.