Inheritance Tax Planning Strategies

Legal ways to reduce the IHT burden on your estate.

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax on your estate when you die. Your estate includes property, savings, investments, and possessions. The standard rate is 40% on anything above the tax-free threshold. This can be a significant amount, which is why planning ahead can save your family hundreds of thousands of pounds.

The Nil-Rate Band

Everyone has a nil-rate band of £325,000 (2024/25). This means the first £325,000 of your estate is tax-free. Anything above this is taxed at 40%. If you're married or in a civil partnership, you can pass your entire estate to your spouse tax-free, and they inherit your unused nil-rate band. This effectively gives couples a £650,000 allowance.

The Residence Nil-Rate Band

If you leave your home to direct descendants (children or grandchildren), you get an additional £175,000 allowance – the residence nil-rate band. Combined with the standard nil-rate band, this gives you £500,000 tax-free. Couples can have £1 million between them. However, this additional allowance tapers away if your estate exceeds £2 million.

Simple IHT Reduction Strategies

The most straightforward way to reduce IHT is to give money away while you're alive. You can gift up to £3,000 per year without it counting towards your estate (the annual exemption). Small gifts of up to £250 per person are also exempt. Gifts to spouses or charities are always tax-free. Regular gifts from income (not capital) can also be immediately exempt if they don't affect your standard of living.

The Seven-Year Rule

Larger gifts become exempt from IHT if you survive for seven years after making them. This is called a potentially exempt transfer (PET). If you die within three years, the full gift is taxable. Between three and seven years, taper relief reduces the tax. This means thoughtful gifting in your 60s and 70s can significantly reduce your taxable estate.

Using Pensions

Pensions don't usually form part of your taxable estate for IHT. This makes them incredibly efficient for passing wealth to the next generation. If you die before age 75, your beneficiaries can inherit your pension completely tax-free. After 75, they pay income tax but there's no IHT. This is why spending other assets first in retirement and preserving pensions can be smart estate planning.

Life Insurance in Trust

Life insurance payouts are normally part of your estate for IHT purposes. However, if you write the policy in trust, the payout goes directly to beneficiaries outside your estate. This means your family receives the insurance money to help pay any IHT bill without it increasing the bill. Setting up a trust is straightforward and most insurers provide templates.

Business and Agricultural Relief

Business assets and agricultural property can qualify for IHT relief of up to 100%. This includes shares in unlisted trading companies held for at least two years. AIM shares in qualifying companies can also get business relief. These reliefs are complex but can be extremely valuable – another reason to get professional advice if you have business interests.

When to Get Professional Advice

If your estate is likely to exceed £500,000 (£1 million for couples), professional IHT planning is worthwhile. An adviser can review your situation, model different strategies, and implement solutions like trusts or structured gifting programs. The fees are almost always dwarfed by the tax savings for larger estates.

How We Can Help

At Harmond Capital, we help clients minimise IHT through careful planning. We'll review your estate, identify opportunities for tax-efficient gifting, advise on pension and trust strategies, and work with solicitors to implement solutions. Our goal is to maximise what you can pass to your loved ones.