By planning your estate effectively, you can reduce the amount of Inheritance Tax (IHT) payable and ensure your assets are passed on to your loved ones in the most tax-efficient way possible. If you’re unsure about the best strategy for your situation, we’re here to help.
Reducing your estate’s tax burden
Inheritance tax (IHT) is charged at 40% on the value of your estate that exceeds the nil-rate band, which remains at £325,000 for the 2025/26 tax year. An additional residence nil-rate band (RNRB) of £175,000 is available if your home (or a share of it) is left to direct descendants. When combined, this means a total IHT-free threshold of up to £500,000 for individuals or £1 million for married couples or civil partners.
For estates worth over £2 million, the RNRB tapers by £1 for every £2 above this threshold. It’s important to note that unused allowances can be transferred to a surviving spouse or civil partner, doubling the threshold available on the second death.
Gifts made during your lifetime are generally exempt from IHT if you survive for seven years after making them. However, gifts within this timeframe may still be subject to tax. Taper relief could reduce the tax rate on gifts made between three and seven years before death.
Key considerations
- Make use of exemptions: The annual gift exemption allows you to give up to £3,000 tax-free each year. You can also make small gifts of up to £250 per person, wedding gifts, or gifts from surplus income without triggering IHT.
- Plan lifetime giving: Consider using the seven-year rule for larger gifts to reduce the value of your estate over time.
- Trusts and estate planning: Putting assets into a trust can help reduce the value of your estate subject to IHT, but it’s important to get professional advice to ensure compliance.
- Residence nil-rate band: Review your will to ensure your estate qualifies for the RNRB if applicable, and confirm how property is passed to direct descendants.
- Spousal exemptions: Ensure you take advantage of the full spousal transfer of unused IHT allowances to maximise the tax-free thresholds on the second death.
- Business and agricultural reliefs: For qualifying assets, investigate reliefs that could reduce IHT on business or agricultural property.
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.