Inheritance Tax Planning: How to Protect Your Legacy
Inheritance Tax (IHT) is a financial concern for many families in the UK. With property prices rising and thresholds staying frozen, more estates are being caught in the tax net than ever before. The good news is that with effective inheritance tax planning, you can minimise or potentially avoid a hefty tax bill for your loved ones.
Understanding how Inheritance Tax works and using legal exemptions can help ensure more of your estate passes to your family, rather than the tax office.
What Is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who has died, including their property, money, and possessions. The standard IHT rate is 40%, but it only applies to the value of the estate above a certain threshold.
In the UK, the current tax-free threshold (also known as the nil-rate band) is £325,000. If your estate is worth less than this, no tax is due. Anything above that amount may be taxed at 40%, unless exemptions or reliefs apply.
Who Pays Inheritance Tax?
Inheritance Tax is usually paid by the executor of the will or the administrator of the estate. It must typically be paid within six months of the person’s death. Failing to pay on time may result in interest charges from HMRC.
The tax is paid from the estate itself before the assets are distributed to beneficiaries. In some cases, life insurance or trusts are used to cover the tax bill.
Inheritance Tax Thresholds and Rates
Here’s a summary of the current IHT allowances and rates:
| Item | Amount / Rate |
|---|---|
| Nil-rate band | £325,000 |
| Residence nil-rate band (if leaving home to direct descendants) | £175,000 |
| Combined allowance for a married couple | £1,000,000 (if unused allowances are transferred) |
| Inheritance Tax rate | 40% (on amount above threshold) |
| Reduced rate if 10% of estate goes to charity | 36% |
These figures are correct for the 2025/26 tax year, and more information can be found at gov.uk.
How to Reduce Your Inheritance Tax Bill
Inheritance Tax planning is not about avoiding tax illegally—it’s about using all the legal allowances, exemptions and planning tools available. Below are some of the most effective methods:
1. Use the Spouse or Civil Partner Exemption
Anything you leave to your spouse or civil partner is completely exempt from Inheritance Tax, regardless of the value. Additionally, any unused tax-free allowance can be passed on to your partner, doubling the threshold available to the surviving spouse.
2. Make Use of the Residence Nil-Rate Band
If you leave your main home to your children or grandchildren, your estate may benefit from an additional £175,000 allowance. This is on top of the standard £325,000 threshold and applies even if the property is worth more than that.
3. Gifting During Your Lifetime
Gifts can be a powerful way to reduce the size of your estate. However, there are rules to be aware of:
| Gift Type | Exempt Limit | Conditions |
|---|---|---|
| Annual exemption | £3,000 per tax year | Unused amounts can be carried over one year |
| Small gifts | £250 per person | Cannot be combined with other exemptions for the same person |
| Wedding gifts | £1,000 to £5,000 | Varies depending on your relationship to the couple |
| Regular gifts from income | Unlimited | Must not affect your standard of living |
| Potentially exempt transfers | Unlimited | Must survive 7 years for full exemption |
For full HMRC guidance, visit gov.uk.
4. Set Up a Trust
Trusts can help manage your assets and reduce Inheritance Tax liability. Assets held in certain types of trusts may not count towards your estate, depending on the structure.
Common types include:
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Discretionary trusts
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Bare trusts
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Interest-in-possession trusts
Trusts are complex, so it’s highly recommended to speak with a qualified estate planner or solicitor to ensure the right setup for your goals.
5. Donate to Charity
Leaving at least 10% of your estate to a registered charity reduces your Inheritance Tax rate from 40% to 36%. This can result in a substantial saving and ensures your legacy supports a good cause.
6. Consider Life Insurance
Taking out a life insurance policy to cover the expected IHT bill can protect your beneficiaries from having to sell assets like property. Be sure the policy is written in trust; otherwise, the payout may be added to your estate and become taxable.
When Should You Start Inheritance Tax Planning?
The earlier you start, the better. Lifetime gifts, trust setups, and estate planning strategies often rely on surviving a minimum number of years (commonly 7 years) after making a gift. Starting early increases your chances of maximising tax-free transfers.
Major life changes—like marriage, divorce, retirement, or buying a property—are also good times to revisit your estate plan.
Common Mistakes to Avoid
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Not writing a will – Dying intestate means the government decides who inherits, which can lead to unnecessary tax
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Failing to use lifetime exemptions – Many people forget the annual gift allowance
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Not updating beneficiaries on life insurance or pensions
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Delaying planning – Procrastination reduces available options
Do You Need a Financial Advisor?
While it’s possible to do basic planning yourself, hiring a professional can ensure you:
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Maximise available allowances
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Avoid legal pitfalls
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Structure your estate efficiently
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Understand trust implications
An estate planner or solicitor specialising in tax planning can tailor advice based on your personal situation.
Conclusion
Inheritance Tax can be a significant burden, but with proper planning, it’s often avoidable or significantly reduced. Whether it’s through lifetime gifting, trust planning, or simply writing a will, the key is being proactive.
Protecting your estate ensures that more of your wealth passes to your loved ones, not the tax office. For more guidance, you can visit moneyhelper.org.uk