Inheritance Tax (IHT) in England can significantly impact the value of an estate passed on to beneficiaries. Without proper planning, your loved ones could face a tax bill of 40% on assets exceeding the tax-free threshold. However, by understanding the rules and using tax-efficient strategies, you can minimise or even eliminate this burden.
This has become even more important recently with the announcements that pensions will form part of the deceased’s estate for IHT from 5 April 2027 and the taxation of business and agricultural assets above £1 million from April 2026. Many more estates will now face a tax bill.
Understanding Inheritance Tax
IHT is charged at 40% on estates valued above the nil-rate band (NRB), which currently stands at £325,000. Anything below this threshold is tax-free. There is also a residence nil-rate band (RNRB), currently £175,000, which applies when passing on a main home to direct descendants, effectively increasing the threshold to £500,000 for individuals or £1 million for married couples and civil partners. The RNRB can be lost to estates exceeding £2 million but careful planning and will writing can often protect one or both RNRBs in an estate.
Key strategies for Inheritance Tax planning
1. Use your tax-free allowances
Each individual has an NRB of £325,000, and any unused portion can be transferred to a surviving spouse or civil partner, potentially doubling the tax-free threshold.
2. Make tax-free gifts
You can reduce your estate by giving away assets during your lifetime. Some key exemptions include:
Annual exemption: You can give away £3,000 per year tax-free (and double this if you did not use it in the previous year).
Small gifts exemption: You can give up to £250 per person per year.
Wedding gifts: Parents can give up to £5,000, grandparents £2,500, and others £1,000.
Potentially Exempt Transfers (PETs): Larger gifts are tax-free if you survive for seven years after making them. If you die within this period, a sliding scale (taper relief) may reduce the tax. Once seven years have passed further gifts can be made without being affected by earlier ones.
3. Set up trusts
Placing assets into a trust can remove them from your estate, reducing IHT liability. Trusts can provide for beneficiaries while keeping control over how assets are used. The NRB of £325,000 may be available for chargeable gifts into trust and seven years after the NRB may be available again. They can also help to defer capital gains tax on lifetime gifts.
4. Leave money to charity
Gifting at least 10% of your estate to charity reduces the IHT rate on the remaining taxable estate from 40% to 36%.
5. Use business relief and agricultural relief
Certain business and agricultural assets can still be passed on tax-free or at a reduced rate if they meet eligibility criteria, so it is important that this relief is not wasted.
6. Use of your pension pot
Consider using your pension during your lifetime. Previous planning involved using the pension held in trust for the next generation but this will very soon no longer be tax efficient. The tax-free lump sum could be drawn now and if not needed passed to the next generation as a PET (see above). The pension could be used to subsidise other gifts you may previously have been planning to live off.
Conclusion
Inheritance Tax planning requires foresight and careful financial management. By making use of allowances, trusts and tax-efficient gifting, you can significantly reduce the IHT burden on your loved ones. This article is an overview to provide ideas for consideration and should not be considered as advice in isolation. Advice should be sought before acting on any of the above points.
The next step
Consulting your UHY adviser can help ensure your estate is structured in the most tax-efficient way. Early planning is much more effective than planning late in life. Contact Peter Tuffin on p.tuffin@uhy-uk.com or your usual UHY probate adviser.
