Planning for the future is about more than simply growing your wealth — it’s about protecting it for the next generation. Inheritance Tax (IHT) can pose a significant challenge to that goal. Potentially reducing the value of what you pass on to loved ones. With careful and timely planning, there are legitimate and effective strategies available to reduce your IHT liability.
In this article, we’ll explore what inheritance tax is. We’ll review how it could affect your estate, and what steps you can take to mitigate its impact. We’ll look at ensuring that more of your wealth goes to the people and causes that matter most to you.
What Is Inheritance Tax?
Inheritance Tax is a tax levied on the estate (property, money, and possessions) of someone who has died. In the UK, the standard IHT rate is 40%, charged on the portion of an estate that exceeds the tax-free threshold known as the nil-rate band.
As of the 2024/25 tax year, the standard nil-rate band is £325,000 per individual. There is also a residence nil-rate band (RNRB) of up to £175,000 available when a main residence is passed on to direct descendants, such as children or grandchildren. This means that, with both allowances combined, a married couple could potentially pass on up to £1 million tax-free depending on estate value size.
However, any assets above these thresholds could be subject to the 40% IHT charge, significantly diminishing the value of your estate for your beneficiaries.
Understanding Your IHT Liability
The first step in effective inheritance tax planning is to understand the value of your estate and how it will be assessed for IHT purposes. This includes property, savings, investments, pensions, and other valuable assets — minus any outstanding debts or liabilities.
It’s important to keep in mind that some assets, such as certain business or agricultural property, may qualify for reliefs or exemptions. A financial adviser can help you understand how these rules apply to your unique circumstances.
Strategies to Reduce Inheritance Tax
There are several ways to reduce your potential IHT liability, and with careful planning, it’s possible to retain more wealth within the family and reduce what goes to HMRC. Let’s have a look at some of the most commonly used strategies:
1. Gifting During Your Lifetime
Gifting can be one of the most straightforward ways to reduce the value of your taxable estate. Individuals are allowed to give away up to £3,000 per year tax-free (annual exemption), and unused allowance can be carried over for one year.
In addition, small gifts of £250 per person and wedding gifts (up to £5,000 for a child) are exempt. Gifts made more than seven years before your death typically fall outside your estate under the “seven-year rule,” assuming no reservation of benefit applies.
2. Trusts
Trusts can provide control over how your assets are managed and distributed, while also potentially helping to reduce IHT. Depending on the type of trust, assets placed within may no longer form part of your estate for IHT purposes. However, trust arrangements can be complex and require professional advice to ensure suitability and compliance with tax regulations.
3. Charitable Donations
Leaving part of your estate to charity can reduce your IHT liability. Charitable gifts exempt from IHT, but if you leave at least 10% of your net estate to a registered charity, the overall IHT rate on the rest of your estate could be reduced from 40% to 36%.
This is a powerful way to make a lasting difference to causes you care about, while also reducing the tax burden on your estate.
4. Tax-Efficient Investments
Certain investments, such as those qualifying for Business Relief (BR), can be passed on free of IHT if held for at least two years and at the time of death. Examples include shares in certain unlisted trading companies.
However, these investments can be high-risk and are not suitable for everyone. Independent financial advice is essential to assess whether this route aligns with your risk profile and financial goals.
The Importance of Early Planning
When it comes to inheritance tax, the key is early and proactive planning. Many of the most effective strategies — such as gifting or establishing trusts — depend on timing and long-term execution. Waiting until later in life can reduce the options available and limit their effectiveness.
Creating a clear, legally robust estate plan now allows you to:
- Protect your wealth for future generations
- Provide certainty for your family
- Support charitable causes close to your heart
- Minimise the impact of IHT
Reviewing Your Estate Plan Regularly
Inheritance tax rules can change, and your personal circumstances may evolve. Regularly reviewing your estate plan ensures it remains fit for purpose and aligned with current legislation. This is especially important if you’ve experienced significant life events, such as marriage, divorce, the birth of a child, or receiving an inheritance yourself.
Seeking Professional Advice
Inheritance tax planning is a complex area that often intersects with other aspects of financial planning such as pensions, wills, and investment strategy. That’s why it’s crucial to seek regulated financial advice from a qualified professional.
At Castle Stonebridge Financial Planners, we are here to help you make informed decisions and create a strategy tailored to your goals. Our approach is personalised, FCA-compliant, and always in your best interest.
Preserve What Matters Most
Your legacy is about more than money — it’s about peace of mind, care for your loved ones, and making a lasting impact. With the right guidance and forward-thinking approach, you can take control of your estate planning and ensure your wealth is passed on in the way you intend.
📞 Get in touch with Castle Stonebridge Financial Planners today to explore how we can help you reduce your inheritance tax exposure and preserve your legacy.
You can also email us at: Advice@castlestonebridge.co.uk
Important Note: The value of investments can go down as well as up and you may not get back the amount you invested. Tax treatment depends on individual circumstances and may be subject to change. This article does not constitute personal financial advice. Always consult a regulated financial adviser before making decisions.
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