Get wise to Inheritance Tax

Since 2010, the ‘nil rate band’ (NRB), which is the basic tax threshold for Inheritance Tax (IHT), has been frozen at £325,000. This means that up to £325,000 of an estate is IHT free on death. If your estate surpasses the £325,000, IHT will be payable at a rate of 40% (unless any existing reliefs or exemptions apply which are discussed below).

In real terms, that means you only need to be living in a modest property in the south east of England to fall into the net of 40% inheritance tax on the value of your estate over £325,000. There are, however, some exemptions:

However, the Labour Party have made some changes to IHT rules which could significantly impact the way in which money can be left free from tax in the coming years. These include the following:

1. Pensions

• At present, pensions fall outside a persons estate. This means that when they die, the pension is not subject to IHT which motivates people to pay into their pensions.
• However, from 6 April 2027, pensions will no longer be exempt from IHT and they will form part of an individual’s estate thereafter. As a result, clients have thought about whether they should be taking money out of their pensions in anticipation of this but if in doubt this is something they should take pensions advice from an independent financial advisor.

2. Business and Agricultural Property Relief:

• At present, there is Business Property Relief (BPR) and Agricultural Property Relief (APR) which allow qualifying business and agricultural assets to seek up to 100% relief from IHT.
• However, from 6 April 2026, there are plans to cap the 100% relief to the first £1,000,000 and thereafter it would be 50% relief with IHT payable at a rate of 20%.

3. Seven year rule for lifetime gifts:

• At present, there is a seven year rule which allows a person to leave someone money without triggering any IHT. The seven year rule means the person leaving the money or making the gift must live for seven years after doing so.
• There has been no confirmation that this is changing but there has been suggestions that the seven year rule could be extended to ten years. This was not confirmed in the spring budget but if you were planning on making such gifts, it may be sensible to carry this out sooner rather than later to ensure you are not subject to any extensions.

You should also consider the existing rules which may assist in reducing your IHT liability. At present, there are several exemptions and reliefs that can help reduce IHT liability.

Existing exemptions to IHT

• Spouse/Civil Partner: Generally, there is no IHT between spouses or civil partners (provided they are both either English domiciled or both non-domiciled – domicile is tricky so if this is an issue, take advice!). The NRB can be transferred over from one spouse to the other – so a total of £650,000. However, if you are not married or in a civil partnership, then regardless of how long you have been together or whether you have children, there is no legal recognition of this and thus no exemption. Whilst this isn’t the most romantic of reasons to tie the knot, it is a sensible one.
• Charity: Gifts to UK or EU charities in your will pass IHT free. However, if the charity is outside of the UK or EU, the exemption might not apply (again, take advice!).

Existing reliefs to IHT

There are other reliefs that reduce the inheritance tax payable on your estate.

• The Residence Nil Rate Band: The residence nil rate band (RNRB), is a further £175,000. However, there are conditions for this to apply:

1. – Owning (at some point) a property that is your residence; and
2. – Benefiting your direct descendants (so children and grandchildren but also, interestingly, stepchildren). If you don’t have children, unfortunately this relief will not apply.
3. – If your estate exceeds £2m however, this relief will taper off.

• Charity: If you leave at least 10% of your estate to charity, as well as the gift itself passing IHT free, then the rate of tax on the rest of your estate is reduced to 36% rather than 40%.
• Business assets: If you own a trading business or shares in a trading business then you can claim relief on the value at either 50% or 100%. However, as discussed above, this will be changing soon.

There are also ways that you can plan to reduce IHT on your estate in your lifetime which should also be considered depending on how large your estate is. At present, the current rules allow the following:

• Gifts: Gifts of £3,000 in total per year and smaller gifts of £250 (although not to a £3,000 recipient).
• Larger gifts: Larger gifts can also be made, but you need to survive by seven years (at present) for the gift to be outside of your estate. You don’t need to report the gift formally but do need to keep records of gifts made.
• Income gifts: Gifts out of surplus income, although it is vital to keep detailed records in each tax year to show the income is surplus.
• IHT insurance policies: Even if you can’t avoid IHT entirely, you might be able to cover the cost with a life policy taken out to pay the tax.
• Existing insurance policies, pensions and death in service benefits: If these are written under trust or nominated, then they will pay out IHT free. This can be overlooked, so do check! (But remain mindful of incoming changes by the Labour Party as to how pensions are taxed on death.)

If you are considering making a gift, you must ensure that the person making the gift must not retain any kind of benefit (this is called a ‘gift with reservation of benefit’). For example, you can’t gift your house but continue to live there as the gift will fail – unless you paid a market rent, say, to live there.

Clients also often ask if trusts can save IHT. A trust itself is just a ring-fence around a gift and doesn’t necessarily save IHT. Trusts do have a lot of benefits – but it is essential to take proper advice before setting one up.

Most IHT reliefs aren’t automatic and must be claimed. Therefore, if you are planning in your lifetime or writing your will, take advice! Bear in mind that if your executors deal with probate themselves rather than through a solicitor, this could mean that the estate misses out on reliefs that will reduce the IHT payable on your estate.

To be fully informed about how IHT might affect your estate, contact our expert Private Client team.