Planning ahead for the future is one of the most important steps you can take to protect your family and ensure that your wishes are carried out. At Lambert Chapman, we receive many questions about inheritance tax (IHT) and estate planning. Below, we’ve answered the most common queries to help you understand the essentials and start thinking about how best to structure your own affairs.
What exactly is Inheritance Tax (IHT)?
Inheritance Tax (IHT) is a government tax charged on the value of someone’s estate when they die. The estate includes property, savings, investments, and personal possessions. The standard rate is 40%, but this only applies to the portion of the estate above the available allowances.
For example, if your estate is worth £500,000 and your nil-rate band allowance is £325,000, you would pay 40% tax on £175,000. That could mean a tax bill of £70,000 for your heirs. However, with careful planning, allowances, reliefs, and exemptions can reduce or even eliminate this liability.
How much can I leave tax-free?
Every individual has a nil-rate band of £325,000. Additionally, there is the residence nil-rate band of up to £175,000, available if you leave your home to your children or grandchildren. Together, this means you could potentially pass on £500,000 tax-free.
Married couples and civil partners can combine allowances, meaning up to £1 million can be passed to the next generation in the right circumstances. Transfers between spouses or civil partners are also generally exempt from IHT, ensuring assets can move freely between partners during their lifetimes or upon death.
What strategies can help reduce Inheritance Tax?
There are several effective methods to reduce IHT:
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Lifetime gifts – Giving assets away during your lifetime can be highly effective. Gifts made more than 7 years before death are usually free of IHT.
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Use of trusts – Placing assets into trusts can protect them from immediate tax and give you control over how and when they are distributed.
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Business and agricultural relief – Business assets or agricultural property may qualify for up to 100% relief, meaning they can pass on without an IHT charge.
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Life insurance policies – Policies written in trust can provide funds to cover any IHT liability, protecting your estate for beneficiaries.
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Charitable giving – Leaving at least 10% of your estate to charity can reduce the IHT rate on the remainder from 40% to 36%.
- Use of Family Investment Companies (FIC) – Appropriate assets can be transferred into a FIC, and if it is structured correctly, could allow the growth in the asset value to be in the hands of the next generation, whilst retaining access to income.
The best strategy depends on your circumstances. That’s why professional advice is crucial.
Do I need both an accountant and a solicitor for estate planning?
Yes, but for different purposes. A solicitor is essential for drafting legal documents such as wills and trust deeds. An accountant, like our team at Lambert Chapman, ensures that the overall structure is as tax-efficient as possible. Together, they provide a complete estate planning service, ensuring your wishes are legally binding and financially sound.
When should I start estate planning?
The earlier you begin, the more options you have. For example, gifts made early can fall outside your estate after seven years, which means more of your wealth passes to loved ones tax-free. Estate planning isn’t just for retirees – it’s relevant at any stage of adult life, especially if you own property, run a business, or have dependants.
What happens if I don’t make an estate plan?
Without a valid will and estate plan:
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The laws of intestacy will determine who inherits your estate, which may not match your wishes.
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Your beneficiaries may face large tax liabilities, reducing the amount they ultimately receive.
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Family disputes are more likely, especially if your intentions are unclear.
In short, failing to plan means losing control over how your wealth is managed and passed on.
How often should I review my estate plan?
We recommend reviewing your estate plan every few years, or sooner if there are significant life changes such as marriage, divorce, children, grandchildren, or major asset acquisitions. Tax laws also change frequently, so even a well-structured plan may become less effective over time. Regular reviews ensure your strategy remains aligned with your goals and the latest rules.
Final thoughts
Inheritance tax and estate planning may seem daunting, but with the right advice, you can ensure your wealth is protected and your loved ones are provided for. Proactive planning gives you peace of mind, reduces unnecessary tax, and helps avoid conflict or stress for your family at a difficult time.
📞 Take the Next Step
If you would like tailored advice on inheritance tax or estate planning, speak to our experts at Lambert Chapman today. Our team, led by Lucy Orrow, Tax Partner, can guide you through the process, work with your solicitor where necessary, and build a strategy that ensures your legacy is secure.
01376 326266
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.