Inheritance Tax Planning: How to Protect Your Wealth and Minimise IHT in the UK

Inheritance Tax (IHT) is one of the UK’s most significant wealth transfer costs, and for many families, it comes as an unwelcome surprise. While it’s often associated with the very wealthy, more and more ordinary families are being drawn into the IHT net due to rising property values and static thresholds.

The good news? With the right inheritance tax advice, you can take steps today to protect your wealth and ensure more of it passes to your loved ones , and not HMRC.

Understanding Inheritance Tax in the UK

Inheritance Tax is a levy on the estate (property, money, and possessions) of someone who has passed away. In the UK, the standard inheritance tax rate is 40% on the value of the estate above the current threshold, also known as the “nil-rate band.”

For the 2025/26 tax year, the nil-rate band remains at £325,000 per person. There’s also a Residence Nil-Rate Band (RNRB) of up to £175,000 if you leave your home to direct descendants. In practice, this means a married couple could pass on up to £1 million without paying IHT,  but careful planning is required to achieve this.

Why Inheritance Tax Planning Matters

Many people think inheritance tax planning is only for those with vast fortunes. The reality is quite different. With average UK house prices hovering near £300,000 and many homes worth significantly more, it’s surprisingly easy for an estate to breach the threshold.

The right inheritance tax tips can help you:

• Reduce or even eliminate your IHT liability

• Pass more wealth to your family in a tax efficient way

• Avoid unnecessary legal disputes

• Maintain some control over your assets during your lifetime

Inheritance Tax Planning Step by Step

Here’s a straightforward inheritance tax planning step-by-step approach you can follow:

1. Understand Your Current Position

List all your assets and liabilities. Include your home, savings, investments, life insurance policies, business interests, and personal possessions. This will give you a clear picture of your estate’s potential IHT exposure.

2. Make Use of Allowances and Exemptions

• Annual Gift Allowance: You can give away up to £3,000 per year without it counting towards your estate.

• Small Gifts: Up to £250 per person per tax year is exempt.

• Wedding Gifts: £5,000 for a child, £2,500 for a grandchild, and £1,000 for others.

• Gifts to Charity: Entirely exempt from IHT.

3. Use the Seven-Year Rule

Gifts made more than seven years before death are generally exempt from IHT. These are called Potentially Exempt Transfers (PETs). If you survive seven years after making a gift, its value won’t be included in your estate for tax purposes.

4. Consider Trusts

Trusts can be a powerful inheritance tax planning tool. They allow you to transfer assets out of your estate while retaining some control over how and when they are used. Different types of trusts have different tax implications, so seek professional inheritance tax advice before setting one up.

5. Pass on Your Home Effectively

If your home is your largest asset, you can use the Residence Nil-Rate Band to pass it to direct descendants with reduced IHT. Downsizing or gifting property can also be part of a long-term strategy.

6. Review Your Will

A valid, up-to-date will ensures your wishes are carried out and can minimise tax liabilities. Consider using clauses that make use of spousal exemptions and nil-rate band transfers.

7. Use Life Insurance

A whole-of-life policy written in trust can provide a tax-free lump sum to cover any IHT liability, ensuring your family isn’t forced to sell assets to pay the tax bill.

Common Mistakes in IHT Planning:

Inheritance Tax (IHT) can take a significant bite out of the wealth you’ve worked hard to build, but in many cases, large tax bills are the result of avoidable planning mistakes. Understanding these pitfalls is the first step to protecting your estate and ensuring your loved ones inherit as much as possible.

1. Leaving It Too Late

One of the most costly mistakes is delaying IHT planning until it’s almost too late. Many of the most effective strategies, such as gifting assets or setting up trusts , work best when done well in advance.

• Why it’s a problem: Most gifts only fall outside your estate if you survive for seven years after making them. Starting late limits your options and increases your IHT exposure.
  

• Tip: Begin your inheritance tax planning step by step while you’re still in good health and well before you intend to pass on assets.

2. Underestimating the Value of Your Estate

Some people assume they’re “not wealthy enough” to worry about IHT, only to discover their estate value, including property, pensions, and investments, easily exceeds the £325,000 nil-rate band.

• Tip: Get a professional valuation of your assets to understand your true IHT position.

3. Forgetting to Review and Update Wills

An outdated will can unintentionally increase IHT liabilities or cause assets to pass in a tax-inefficient way.

• Tip: Review your will every few years or whenever your personal or financial situation changes.

4. Not Getting Professional Advice

IHT rules are complex and subject to change. Relying on hearsay, outdated advice, or online calculators can leave you exposed.

• Tip: Work with an experienced adviser who can tailor strategies to your situation and keep you compliant with HMRC rules.

Why Professional Advice Is Key

Inheritance tax law is complex, with numerous exemptions, reliefs, and conditions. Professional guidance ensures your plan:

• Meets all legal requirements

• Maximises allowances

• Avoids unintended consequences

This is especially important if your estate includes business assets, overseas property, or complex family circumstances.

Conclusion

Minimising IHT isn’t about avoiding your obligations; it’s about understanding the rules and using them wisely. With proactive planning, you can secure your family’s financial future and ensure your wealth is preserved for generations.

FAQ: Inheritance Tax Planning

Q1: What is the current inheritance tax threshold in the UK?
 A: The standard nil-rate band is £325,000 per person, plus a Residence Nil-Rate Band of up to £175,000 if passing your home to direct descendants.

Q2: How much is the inheritance tax rate?
 A: The standard rate is 40% on the value of the estate above the threshold.

Q3: Can I give away money to avoid IHT?
 A: Yes, within limits. You can gift £3,000 annually without it being taxed, and larger gifts may be exempt if you survive seven years after making them.

Q4: Are gifts to charity exempt from IHT?
 A: Yes. In fact, leaving at least 10% of your estate to charity can reduce your IHT rate to 36% on the remaining amount.

Q5: How do trusts help in inheritance tax planning?
 A: Trusts can remove assets from your estate while allowing you to retain control over them, but they must be structured correctly to achieve tax efficiency.