Inheritance Tax Advice: How to Minimise IHT and Protect Your Estate
What Is Inheritance Tax, and How Does It Work?
Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. In the UK, it is typically charged at 40% on the value of an estate above the tax-free threshold of £325,000. However, with proper tax planning, you may be able to reduce or eliminate IHT liability for your beneficiaries.
This guide covers key strategies to minimise inheritance tax, exemptions, and planning tips to help you protect your wealth.
Who Pays Inheritance Tax in the UK?
✅ Inheritance Tax applies if an estate exceeds £325,000.
✅ Beneficiaries do not usually pay IHT, as it is deducted from the estate before distribution.
✅ Gifts and trusts may be subject to tax, depending on when they were given.
How to Reduce Inheritance Tax Liability
1. Use the Nil Rate Band (£325,000 Allowance)
The nil-rate band (NRB) is £325,000 per person.
If your estate is worth less than this, no IHT is due.
Married couples and civil partners can transfer any unused portion to their spouse, doubling the tax-free allowance to £650,000.
2. Claim the Residence Nil Rate Band (£175,000 Extra Allowance)
If you leave your main home to your children or grandchildren, you can claim an additional £175,000 tax-free allowance.
This means a couple could pass on up to £1 million tax-free.
Tapering applies if the estate is worth over £2 million, reducing the RNRB.
3. Make Tax-Free Gifts
Gifting assets during your lifetime can reduce the size of your taxable estate. The following are exempt from IHT:
✅ Annual exemption: You can give away £3,000 per year tax-free.
✅ Small gifts: Gifts of up to £250 per person per year are exempt.
✅ Wedding gifts: You can give tax-free gifts of up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
✅ Potentially Exempt Transfers (PETs): Larger gifts are tax-free if you survive for 7 years after making them.
4. Set Up Trusts to Protect Your Assets
Placing assets into a trust removes them from your taxable estate, reducing IHT exposure. Common trusts include:
✅ Bare Trusts – Simple trusts where the beneficiary has full ownership at 18.
✅ Discretionary Trusts – Trustees control how assets are distributed, helping protect family wealth.
✅ Interest in Possession Trusts – Beneficiaries receive income from assets but do not own them outright.
5. Donate to Charity to Reduce IHT to 36%
Leaving 10% or more of your estate to charity reduces the IHT rate from 40% to 36% on the rest of your estate.
Charitable donations are fully exempt from IHT.
6. Take Out a Life Insurance Policy
A life insurance policy can cover inheritance tax liabilities and ensure your beneficiaries do not need to sell assets to pay the tax.
✅ The policy must be written in trust to be exempt from IHT.
✅ This strategy helps protect family homes and business assets.
7. Business Property Relief (BPR) for Family Businesses
If you own a business, you may qualify for 100% inheritance tax relief on certain assets.
Shares in unlisted companies and family-run businesses often qualify for BPR.
Agricultural Property Relief (APR) also applies to farmland and estates used for agricultural purposes.
When and How to Pay Inheritance Tax?
IHT is due within 6 months of death.
If the estate includes property, beneficiaries can pay in installments over 10 years.
Payments are made to HMRC using an IHT reference number (IHT422).
Common Inheritance Tax Mistakes to Avoid
❌ Not making a will – Without a will, your estate may not be distributed as you wish.
❌ Failing to use allowances – Many people don’t claim the RNRB or use tax-free gifts.
❌ Delaying estate planning – IHT planning should start early to take full advantage of exemptions.
❌ Not writing life insurance in trust – If not placed in trust, life insurance payouts can be taxed at 40%.
Why You Need Professional Inheritance Tax Advice
Inheritance tax planning is complex, and small mistakes can cost thousands in tax. Working with a financial adviser can help to ensure:
✅ Allowances are used effectively.
✅ Wealth is structured efficiently to minimise tax.
✅ Estate distribution follows your wishes while reducing tax liability.
If you want to protect your wealth and pass on more to your loved ones, start planning for inheritance tax today.
Useful pages
How to Apply for an Inheritance Tax Reference (IHT 422)
How to Claim the Transfer of Unused Residence Nil Rate Band (RNRB)
Disclaimer:
The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. While every effort has been made to ensure the accuracy and reliability of the content, the author and publisher make no guarantees regarding the completeness, suitability, or applicability of the information to your individual circumstances.
Before making any financial decisions, particularly regarding investing, pensions and retirement planning, it is strongly recommended that you consult with a qualified financial adviser or professional. Laws and regulations surrounding pensions may vary and are subject to change, so it is important to stay informed and seek personalised guidance tailored to your specific situation.
The author and publisher disclaim any liability for losses or damages incurred as a result of reliance on the information contained in this article.