Inheritance Tax (IHT) is often misunderstood, but with the right planning, it’s possible to reduce how much tax your loved ones have to pay. Understanding the basics & planning can help protect your estate and ensure more of your wealth goes to the people you care about.
What Is Inheritance Tax?
In the UK, Inheritance Tax is usually charged at 40% on the value of an estate above the tax-free threshold (known as the nil-rate band), which is currently £325,000. Anything below this amount is generally tax-free.
There is also a residence nil-rate band (up to £175,000) if you pass your main home to direct descendants, which can significantly increase the tax-free allowance for families.
Why Inheritance Tax Planning Matters
Without planning, a large portion of your estate could be lost to tax. Inheritance tax planning helps:
- Reduce the tax bill
- Protect family wealth
- Give you control over how your assets are passed on
- Provide peace of mind for you and your family
Key Inheritance Tax Planning Strategies
Make a will
A valid and up-to-date will ensures your estate is distributed according to your wishes and can help make use of available tax allowances.
Use your allowances
Everyone can give away up to £3,000 per year tax-free. Small gifts of up to £250 per person and certain wedding gifts are also exempt.
Gift assets during your lifetime
Many gifts become completely tax-free if you live for seven years after making them. This can be a powerful way to reduce the value of your estate over time.
Leave assets to your spouse or civil partner
Transfers between spouses or civil partners are usually free from inheritance tax, and unused allowances can often be passed on.
Consider trusts
Trusts can help control how assets are distributed and may reduce inheritance tax, especially for larger or more complex estates.
Plan for pensions
Pensions are currently outside your estate for inheritance tax purposes (although this is set to change for most pensions from 06/04/2027), making them an effective tool for passing on wealth tax-efficiently. Given the changes, it is vital to review your position.
Use life insurance wisely
A life insurance policy written in trust can help cover an inheritance tax bill, preventing loved ones from having to sell assets.
Review Your Plan Regularly
Inheritance tax rules can change, and so can your personal circumstances. Reviewing your plan regularly ensures it remains effective and aligned with current legislation.
Planning Ahead Can Make a Lasting Difference
Inheritance tax planning in the UK doesn’t have to be overwhelming. With early planning, smart use of allowances, and professional advice where needed, you can significantly reduce the tax burden on your estate and leave more behind for your family.
Don’t forget that the Government can change the rules (like they currently are doing for pensions) so tax planning needs regular review.
Take the Next Step with Confidence
With legislation forever evolving, now is the right time to review your position.
Financial Fortress offers a free, no-obligation first meeting to help you understand your options and put a clear plan in place.
Book your free, no-obligation inheritance tax review today and ensure more of your wealth goes to your family – not the taxman.