Inheritance Tax Planning: A Guide for UK Residents

With the ever-changing landscape of tax legislation, planning ahead for inheritance tax (IHT) is critical for UK residents looking to maximise the legacy they leave behind. Inheritance tax can significantly reduce the amount of wealth transferred to your loved ones, but with careful planning, you can minimise its impact. This guide covers practical advice on inheritance tax planning, assuming the standards and exemptions set for the year 2025.

Understanding Inheritance Tax (IHT)

In the UK, inheritance tax is levied on the estate (property, money, and possessions) of someone who has died. As of 2025, the standard IHT threshold is £325,000. Estates valued over this amount are typically charged at 40% on amounts above the threshold. However, there are several ways to legally reduce this liability.

1. Make a Will

Making a will is the first step in effective inheritance tax planning. A will not only allows you to designate heirs for your assets but also can help in structuring your estate in a way that reduces tax liabilities. Without a will, your estate may not be distributed according to your wishes, and could result in higher tax implications. For professional assistance, consult a solicitor to help draft a will that complies with current laws and maximises tax benefits. You might consider contacting organisations such as the Law Society for guidance on finding a solicitor.

2. Gift Allowances

Utilising gift allowances is a prominent strategy for inheritance tax planning. As of 2025, 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 during the tax year and larger gifts made as wedding or civil ceremony gifts (£5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 for another person) are also exempt.

3. Potentially Exempt Transfers (PETs)

Gifts made more than seven years before your death are generally not counted towards the value of your estate for IHT purposes. These are called Potentially Exempt Transfers (PETs). Keep in mind that if you pass away within these seven years, the tax rate decreases the longer you survive after making the gift, a rule known as ‘taper relief’.

4. Trusts

Placing your assets in a trust can be an effective way to manage your estate and reduce IHT. There are various types of trusts and choosing the right one depends on your specific circumstances. Trusts can help to control and protect your assets, ensuring they are passed on according to your wishes while benefiting from certain tax exemptions. Consulting a trust and estate practitioner is advisable. The Society of Trust and Estate Practitioners (STEP) is a great resource for finding accredited professionals.

5. Life Insurance Policies

A life insurance policy can be structured to cover potential inheritance tax liabilities. By placing the policy in trust, the payout can be excluded from your estate, meaning it won’t be subject to IHT and will go directly to your beneficiaries. Always consult a financial adviser to tailor the policy to your needs. Consider checking with providers or resources such as Money Advice Service for additional information on setting up life insurance effectively.

6. Invest in IHT Efficient Investments

Certain investments, such as those in AIM-listed companies or enterprise investment schemes, can be IHT efficient. These are often riskier investment options but might be free from IHT if held for a period of two years at the time of death. Financial advice tailored to your risk profile is essential when considering these options. Engage with a certified financial advisor to explore this route.

Effective inheritance tax planning is about understanding your options and acting early to structure your estate wisely. By adopting these strategies, you can ensure your loved ones benefit as much as possible from your assets. Remember, seeking professional advice is always recommended to tailor strategies to your personal circumstances.