Inheritance Tax planning tips for UK estates

Inheritance Tax applies to most of your assets, typically covering your home, additional properties, savings and investments, business assets and personal possessions. Long-term UK tax residents are subjected to IHT on their assets wherever they are situated in the world whereas those who are not long-term UK residents (broadly if they have not been UK tax resident for at least 10 of the last 20 tax years) are only subject to UK Inheritance Tax on their UK situs assets.

Gifting is an efficient and effective way of passing wealth to loved ones while at the same time reducing the value of your estate for Inheritance Tax purposes.

Lifetime gifts are immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small Gift (£250 pa) exemptions. If you have a larger disposable income, you might want to consider whether you qualify for the normal expenditure out of income exemption, which has no limit.

Larger lifetime gifts can also be made, but they do come with some rules. You can make a gift of any financial amount to another individual, but if you pass away within seven years of making that gift, then some or all of that gift could be classed as part of your estate for IHT purposes.

It's important to note that potential changes to lifetime gifting for Inheritance Tax purposes could be introduced in the Autumn Budget. If you wish to speak with an adviser about these potential changes, do get in touch. 

If you don’t wish to make outright gifts, a Trust or Family Investment Company can help with Inheritance Tax planning. This can have the effect of removing wealth (and future growth) from your estate while still enabling you to have control over the assets, as well as offering an element of asset protection in the event of a failed business or relationship breakdown.

Different trust types carry distinct tax rules and reporting responsibilities, so seek specialist advice before implementation. 

Pensions typically sit outside your estate for Inheritance Tax purposes; however, from April 2027, pensions will be subject to Inheritance Tax. From April 2027, Inheritance Tax will only apply to those aged 75 and under, where funds are not transferred to a spouse.

From age 75, both Inheritance Tax and Income Tax can apply unless funds pass to a spouse. Higher drawdowns, charitable giving or annuities, and marriage or alternative succession arrangements should be considered as part of Inheritance Tax planning.

Read more on these changes

A Will is one of the most overlooked financial documents and is perhaps the most essential. Without a Will, your estate will be distributed under the intestacy rules; therefore, a Will is vital to ensure your assets are distributed according to your wishes, making it an effective Inheritance Tax planning tool.

Business Relief is vital for ensuring a business can be passed on to the next generation without a significant Inheritance Tax liability arising. It’s important to note that on 6 April 2026, significant changes to Business Relief will be introduced, with relief cut from 100% to 50% for business interests over £1million.

Read more on these changes

Beyond traditional businesses, various assets are eligible for Inheritance Tax relief.  Investing in certain investments, such as AIM shares or farmland, can be an effective part of Inheritance Tax planning. Similar to Business Relief, the 100% relief on these assets will change from 6 April 2026; therefore, planning now is essential.

If you take out an insurance policy, it won’t reduce the amount of Inheritance Tax due on your estate, but the payout may make it easier for your family to pay the bill. You must make sure the life insurance payout goes into a Trust; if you don’t, it will only increase the value of your estate, and you will have to pay more tax.

Inheritance tax is a tax charged on the value of your estate on death.  This includes your home, additional properties, savings and investments (including any ISAs), company shares, cars and personal possessions.

Inheritance Tax is charged at 40% on the value of your assets that exceed the Nil Rate Band (NRB), currently frozen at £325,000.

For married couples and civil partners, you will have a combined Nil Rate band (RNRB) of £650,000. In certain circumstances, this can be increased to £1,000,000 where a home passes to immediate descendants.

Those who are not UK domiciled or deemed domiciled up to 5 April 2025 and those who will not be considered to be a long-term UK tax resident from 6 April 2025 are only subject to UK Inheritance Tax on UK situs assets, and specific consideration is required for cross-border tax issues. If you require support in this area, we have a specialist international tax team.

At present, most pensions sit outside of your estate and are not subject to Inheritance Tax. From April 2027, pensions will be included in your estate for Inheritance Tax purposes.

Read more on Inheritance Tax changes to pensions here.

The Inheritance Tax Nil Rate Band has been fixed at £325,000 since 2009 and has been frozen to 2030.

The Nil Rate Band (NRB) is the limit at which you should not have to pay Inheritance Tax on your estate.  The NRB is currently £325,000.

£In certain circumstances, a Residence Nil Rate Band of up to £175,000 per person may be available increasing the combined NRB and RNRB between a married couple to £1,000,000 where their home passes to a direct lineal descendant.

The executor of your estate will be responsible for paying your Inheritance Tax to HMRC.

Any Inheritance Tax due on failed Potentially Exempt Transfers or any Chargeable Lifetime Transfers (gifts made during someone’s lifetime that fall within seven years of the date of death) is typically payable by the recipient of the gift unless arrangements were made by the donor at the time to make the gift ‘free of tax’.

The deadline for paying Inheritance Tax is the end of the sixth month after a person’s death. If it is not paid within that period, HMRC will start to charge interest.

An IHT bill can be paid by post or online. 

You can reduce your Inheritance Tax liability by making gifts, setting up trusts, or leaving a portion of your estate to charity.

From April 2027, pension funds will be subject to Inheritance Tax. This means that Inheritance tax could be charged on your pension when you die.

Read more on Inheritance Tax changes to pensions here.

Inheritance Tax reliefs can help reduce the tax payable on an estate. These include:

• Annual gift exemption - Annually, you can gift up to £3,000 tax-free. You can also carry forward any unused exemptions from the previous year. For couples, you could have a combined gifting exemption of £12,000.
• Small gifts exemption: Annual, you can give gifts of up to £250 to any number of individuals, provided the total to any one individual doesn't exceed £250.
• Gifts between spouses and civil partners: Gifts between spouses and civil partners are generally exempt from Inheritance Tax, provided the recipient is long-term UK tax resident. Relief - Some business assets can be passed on free of Inheritance Tax or with a reduced bill. Qualifying assets include shares in unlisted companies and business property owned for at least two years. It’s important to note that significant changes are being introduced to Business Relief in April 2026.
• Agricultural Property Relief - Applied to qualifying agricultural property, such as farmland, that has been owned and occupied for at least two years (or seven years if it is let to someone else). Similar to Business Relief, significant changes to Agricultural Property Relief are being introduced from April 2026. From that date, the first £1million of qualifying assets will be exempt from Inheritance Tax and the excess will attract 50% relief. The £1m will be shared across assets qualifying for Business Relief and Agricultural Property Relief on a pro-rata basis.  
• Taper Relief - If you give a gift and survive for at least three years but less than seven, the Inheritance Tax on the gift is reduced on a sliding scale.
• Charitable Donations - You can leave 10% or more of your estate to charity, and the Inheritance Tax on the rest of your estate can be reduced from 40% to 36%.