Inheritance Tax & Estate Planning

Inheritance Tax (IHT) is the tax payable on the estate of a deceased person, including property, money, and possessions.

There’s normally no IHT to pay if either:

• The value of your estate is below the current £325,000 threshold, also known as the Nil-Rate Band (NRB).
• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

The Nil-Rate Band is frozen until April 2028, with IHT potentially charged at 40% above this threshold, it’s therefore crucial to understand how this tax may affect your loved ones’ inheritance.

The Nil-Rate Band (NRB), also known as the IHT Threshold, is a threshold set by the government that determines the value of an estate up to which no IHT is payable. NRB is currently £325,000 for individuals in the 2024/25 tax year.

Married couples and civil partners can combine their NRBs, effectively doubling the threshold to £650,000.

Any unused portion of the NRB of the first spouse or civil partner to die can be transferred to the surviving spouse or civil partner upon their death.

One significant relief that has gained prominence in recent years is the Residence Nil-Rate Band (RNRB).

This additional allowance applies when passing on a main residence to direct descendants, such as children or grandchildren. It provides an additional nil-rate band (where an individual died after 6 April 2017), owning a residence which they leave to direct descendants.

Currently, the maximum RNRB available is £175,000, frozen until April 2028.

Just like the standard NRB, any unused RNRB on the first death of a married couple or registered civil partners has the potential to be transferable even if the first death occurred before 6 April 2017. However, the RNRB does come with conditions and so may not be available or available in full to everyone.

Where an estate is valued at more than £2,000,000, the RNRB will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold. Special provisions apply where an individual has downsized to a lower value property or no longer owns a home when they die.

Trusts are used to protect family wealth for future generations, reducing the inter-generational flow of IHT and ensuring bloodline protection for your estate from outside claims.

The way in which assets held within Trusts are treated for IHT purposes depends on whether the choice of beneficiaries is fixed or discretionary. The most popular types of Trust commonly used for IHT planning can usually be written on either an ‘absolute’ or a ‘discretionary’ basis and the taxation treatment is very different for each.

Loan Trusts and Discounted Gift Trusts are both strategies used in IHT planning to mitigate the impact of tax on an individual’s estate. 

Business Relief (BR) is a tax relief provided by the UK Government created to allow small businesses to be passed down through generations without incurring an IHT liability.

However, over the years the scope of BR has been widened, making it an attractive option for individuals looking to invest in companies in order to remove a potential IHT burden.

Once assets qualifying for Business Relief are held for two years, up to 100% relief may be available from IHT (providing they are still held at the time of death). Subject to meeting all required conditions.

Consider how you can structure your business and assets to maximise the benefits of BR. Further information can be found at gov.uk or speak with your adviser for more comprehensive guidance. 

Each tax year, you can give away some money or possessions free of Inheritance Tax. This includes gifts to your spouse or civil partner, or if you’d like to leave money to a charity. How much is tax free depends on which allowances you use. 

A Potentially Exempt Transfer (PET) refers to a gift or transfer of assets which exceeds the available exemptions. It may become exempt from IHT if the individual survives for a certain period of time after making the gift. 

Seven years is the length of time for any gifts to officially be counted as outside of your estate, meaning that when you pass away, they will be outside the reach of IHT. It is an important consideration in IHT planning, as it affects the tax treatment of lifetime gifts and the potential liability of the individual’s estate upon death. 

If you were to die within seven years, your heirs could face a tax bill depending on how much time has passed since the gift was made. The rate of IHT gradually reduces over the seven-year period – this is called taper relief: