Inheritance Tax Planning
Inheritance Tax – An Overview
Inheritance Tax (IHT) is a tax charged on the value of a person’s estate at death, after allowable deductions, reliefs, and exemptions have been applied. An estate includes property, savings, investments, business interests, and other assets owned at the date of death.
At current rates, estates above the available thresholds are generally taxed at 40%. For many families, this can result in a substantial and unexpected tax bill at precisely the moment when loved ones are least prepared to deal with it.
Despite this, a significant number of people still underestimate—or entirely overlook—the potential impact of IHT. This is unfortunate, as early and properly structured planning can often significantly reduce, or in some cases eliminate, the tax payable, using established and lawful mechanisms.
The Nil Rate Band and Residence Nil Rate Band
Every individual currently has a standard Inheritance Tax Nil Rate Band (NRB) of £325,000, below which no IHT is payable.
In addition, where a main residence is passed to direct descendants (such as children or grandchildren), a further allowance of £175,000 known as the Residence Nil Rate Band (RNRB) may apply. This can increase the total available threshold to up to £500,000 per person, subject to qualifying conditions and tapering for larger estates.
For married couples and civil partners, unused allowances can often be transferred, meaning that combined thresholds may reach up to £1,000,000 in appropriate circumstances.
Why Inheritance Tax Planning Matters
Inheritance Tax is not paid by the person who dies, but by their estate. In practical terms, this means that it is your beneficiaries who bear the cost.
Without planning, IHT can:
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Force the sale of family homes or businesses
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Substantially reduce what children or grandchildren receive
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Undermine carefully built lifetime wealth
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Create unnecessary delay and stress during estate administration
The key to effective IHT mitigation is time. Many reliefs and exemptions rely on planning being undertaken well in advance, often several years before death.
Common IHT Planning Principles
There are a number of well-established methods used to mitigate IHT exposure. These include, but are not limited to:
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Making use of lifetime gifting allowances
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Potentially Exempt Transfers (PETs), which rely on a seven-year survival period
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Strategic use of trusts
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Ensuring allowances are not wasted on first death
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Structuring asset ownership appropriately
Each of these mechanisms has conditions and consequences, which is why coherent planning is essential.
Worked Examples (Illustrative Only)
Example 1 – No Planning
An individual dies with an estate valued at £750,000, comprising property and savings.
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Nil Rate Band: £325,000
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Taxable estate: £425,000
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IHT at 40%: £170,000
This £170,000 is paid out of the estate before beneficiaries receive anything.
Example 2 – Married Couple, No Planning
A married couple each own assets worth £500,000. On the first death, everything passes to the surviving spouse.
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No IHT payable on first death (spouse exemption)
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Survivor now owns assets worth £1,000,000
On second death:
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Combined threshold (assuming full NRB + RNRB): £500,000
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Taxable estate: £500,000
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IHT at 40%: £200,000
Despite no tax on first death, a substantial liability arises later.
Example 3 – Basic Trust Planning on First Death
Using the same facts as above, but with planning in place:
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On first death, £325,000 is directed into a trust
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No IHT payable on first death
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Survivor retains £675,000
On second death:
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Threshold (including RNRB): £500,000
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Taxable estate: £175,000
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IHT at 40%: £70,000
Tax saved: £130,000
The cost of implementing this planning would typically be modest in comparison to the saving achieved.
Example 4 – Early Lifetime Planning
An individual with an estate of £900,000 makes lifetime gifts of £300,000 to children more than seven years before death.
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Gift falls outside the estate
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Remaining estate: £600,000
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Threshold: £325,000 (or higher if RNRB applies)
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Taxable estate: £275,000
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IHT at 40%: £110,000
Without the gift, IHT would have been £230,000.
Early planning saves £120,000.
Inheritance Tax is one of the most significant threats to family wealth, yet it is also one of the most avoidable with proper forward planning.
Are There Any Exemptions?
Yes. Certain deaths are exempt from IHT, including those of individuals who die in active service, such as members of the armed forces and emergency services, subject to statutory conditions.
There are also important exemptions and reliefs for transfers between spouses and civil partners, charitable gifts, and specific asset types, although these often defer rather than remove tax entirely.
When Should You Start Thinking About IHT? The answer is almost always now.
Inheritance Tax is one of the few taxes that can often be reduced dramatically—but only if action is taken early enough.
While seven years or more provides the greatest flexibility, even planning undertaken later in life can still result in meaningful savings.
If your estate is worth more than £325,000, or is likely to grow beyond that level, early planning can make a material difference to what your family ultimately receives.
A Note on the Examples Above
The figures used are deliberately simplified for illustration. In practice, estates often include jointly owned assets, life assurance policies written in trust, business property, pensions, and overseas assets, all of which affect the final calculation.
Every estate is different, which is precisely why individual planning is so important.
Summary
Inheritance Tax is one of the most significant threats to family wealth, yet it is also one of the most avoidable with proper forward planning. Structured early, lawful arrangements can preserve substantial value for future generations and prevent
unnecessary loss to the tax system.