Inheritance Tax – Allowances, Rates & Planning Tips
Inheritance tax (IHT) planning is a crucial part of securing your financial future and making sure your loved ones benefit from your legacy. In the UK, inheritance tax can significantly affect the value of what you leave behind. Yet, with the right knowledge and proactive steps, you can legitimately reduce the amount your family will pay.
Whether you’re just starting your personal finance journey or are looking to optimise your estate, this guide provides clear, actionable steps tailored for UK readers.
What Is Inheritance Tax and Why Does It Matter?
Inheritance tax is a tax on the estate (property, money and possessions) of someone who has died. In the UK, the standard IHT rate is currently 40% and is charged on the part of your estate above the nil-rate band of £325,000 (for the 2023/24 tax year). If your estate is worth less than this, no IHT is usually due. However, different rules, allowances and reliefs can apply, depending on your circumstances.
Why plan for inheritance tax?
You can maximise what you leave to loved ones.
It can provide clarity and reduce stress for your family.
It helps avoid unintended tax liabilities.
Planning can support charitable causes you care about.
Step 1: Understand Your Inheritance Tax Position
Calculate Your Potential Estate Value
Start by listing everything you own and its approximate value. This includes:
Your home and any other property (current market value)
Savings and investments (ISAs, shares, bonds, etc.)
Life insurance policies (if not written in trust)
Personal possessions (cars, jewellery, art, etc.)
Business assets (if applicable)
Deduct debts and funeral expenses—these can reduce the taxable value.
Identify Your Allowances
Most people have the:
Nil-rate band: £325,000 per person.
Residence nil-rate band (RNRB): Up to £175,000 extra if leaving your main home to direct descendants (children, grandchildren, stepchildren).
Married couples and civil partners can combine allowances, potentially passing on up to £1 million tax-free.
Tip: Use this IHT calculator from HMRC to check your exposure.
Step 2: Make a Valid and Up-to-Date Will
Without a will, your assets will be distributed according to the UK’s rules of intestacy, which may not align with your wishes and can have tax implications.
Action Steps:
Write a will with a reputable solicitor or use a regulated online service.
Update your will after key life events (marriage, divorce, births).
Tip: Gifts to your spouse/civil partner or charities in your will are usually exempt from inheritance tax.
Step 3: Use Gifts and Exemptions Efficiently
Certain gifts can be made during your lifetime free from inheritance tax, if planned carefully.
IHT-Free Gifts:
Annual exemption: Give away up to £3,000 each tax year, free of IHT.
Small gifts exemption: Give up to £250 to any number of people each tax year.
Wedding gifts: Up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
Gifts to charities and political parties: Always IHT-free.
Potentially Exempt Transfers (PETs)
Gifts above the exemption bands can become free from IHT if you survive seven years after making them. If you die within seven years, taper relief may reduce the tax due.
Action Steps:
Keep detailed records of gifts given—including amounts, dates, and recipients.
Review your gifts annually to maximise exemptions.
Step 4: Consider Trusts and Life Insurance
Trusts
Placing assets in a trust removes them from your estate (under certain conditions) and can help control how they are used after your death. Types include:
Bare trusts: Assets go straight to beneficiaries at age 18.
Discretionary trusts: Trustees decide how and when to use assets for beneficiaries.
Trusts can be complicated; seek advice from a solicitor or financial adviser.
Life Insurance
A life insurance policy, if written ‘in trust’, pays out directly to beneficiaries and won’t form part of your taxable estate. This can help your loved ones cover the IHT bill itself.
Step 5: Leave Money to Charity
Gifts to charity are always free from inheritance tax. What’s more, if you leave at least 10% of your net estate to charity, the IHT rate on the rest of your estate drops from 40% to 36%.
Step 6: Protect Your Business and Agricultural Assets
Certain business and agricultural assets may qualify for Business Relief or Agricultural Relief, meaning they could be passed on free from IHT (or taxed at a reduced rate).
Action Step: If you own a business or farmland, consult a specialist adviser about claiming these reliefs.
Step 7: Review Your Inheritance Tax Plan Regularly
Family circumstances, property values, and tax rules do change. Set yourself a reminder to review your arrangements at least every 2 to 3 years—or after major life events.
Common Questions About Inheritance Tax Planning
Q: Who pays the inheritance tax?
A: Usually, the executor or administrator of your estate pays IHT before distributing assets to beneficiaries.
Q: Can I avoid inheritance tax completely?
A: Not always, but with careful planning, you can significantly reduce your estate’s liability using exemptions, gifts, trusts, and careful will writing.
Q: Are pensions subject to inheritance tax?
A: Most UK pensions are not considered part of your estate for IHT purposes—another reason to review your pension arrangements.
Q: What if I live outside the UK?
A: UK IHT may still apply if you are deemed UK domiciled. Seek specialist advice if you have offshore assets or live abroad.
Conclusion: Take Action for a Tax-Efficient Legacy
Inheritance tax planning needn’t be intimidating. By understanding your estate’s position, using allowances and exemptions, writing a clear will, and considering trusts and life insurance, you’ll put yourself miles ahead.
Remember, seeking professional advice can be a worthwhile investment, especially for complex estates or business assets. By taking action now, you can secure your legacy and spare your loved ones unnecessary worry.
