Inheritance Tax Planning Guide

Inheritance tax (IHT) is always a topical issue, but thanks to rising property prices and frozen thresholds, it is now affecting an increasing number of households across the UK. In fact, people who would never have thought of themselves as wealthy are now finding their estates may face a significant tax bill.

With that in mind, this inheritance tax planning guide helps you get clear on what inheritance tax is, how it’s calculated, the inheritance tax threshold in 2025 and the most effective inheritance tax planning strategies to help you protect your estate.

What is Inheritance Tax?

Before you can protect your estate by reducing your IHT bill, it’s essential to understand what inheritance tax is and how quickly it can add up.

Simply put, inheritance tax (IHT) is the tax on the value of your estate (i.e everything you own) when you pass away, after deducting debts and liabilities. It applies only to the portion above the tax-free threshold.

The standard rate is 40%, or 36% if you leave at least 10% of your net estate to charity. To put that into context, a £1 million taxable estate could face an eye-watering IHT bill of £400,000.

The Inheritance Tax Threshold 2025

Under the current inheritance tax threshold for 2025, it’s possible for a person to pass on £325,000 tax-free. Anything above that is subject to IHT. Married couples or civil partners can combine allowances, therefore passing on up to £650,000 tax-free.

In addition, the Residence Nil-Rate Band (RNRB) allows up to £175,000 extra when leaving your main home to children or descendants, which is also transferable between spouses. Together, this means a couple can leave up to £1 million tax-free under 2025 rules.

Who Pays Inheritance Tax and When?

The executor of the will is responsible for ensuring that any IHT due is paid. IHT is paid with funds from the estate, and it must be paid within six months of a person’s death. HMRC charges interest on late payments.

If an estate is asset-rich but cash-poor, this timeframe can cause real problems. We’ve seen families forced to sell a property simply to cover the bill. With advance planning, such as using life insurance written in trust, you can ensure funds are available when needed, avoiding having to sell assets that you want your heirs to keep.

Why Inheritance Tax Planning Matters

Imagine this: a couple has a home in Surrey worth £900,000, combined with modest savings and investments. Without planning, that estate could easily face an inheritance tax bill of over £100,000.

This simplified example demonstrates why, whatever your wealth, it’s crucial to plan for what happens to your estate after you pass away. If you don’t, your loved ones could lose a significant amount which you’ve worked a lifetime to build. With the right inheritance tax planning strategies, however, IHT could be reduced or even eliminated altogether.

Why is Inheritance Tax Becoming a Bigger Issue?

Remember that while the £1million allowance (when a couple’s tax-free amount and RNRB are combined) sounds like a lot, property prices have gone up exponentially over the last few decades, particularly in areas such as London and the South East. Yet, IHT thresholds have not changed to reflect that increase. Instead, the NRB has been frozen since 2009 and the RNRB has been frozen since 2020. What’s more is that they will remain frozen until at least 2030.

As a result, more families are being drawn into the IHT net, often without realising it until it’s too late. For instance, if a couple who bought their home 30 years ago for £200,000, that property could feasibly be worth £1,000,000 now, which could result in a six-figure IHT bill if the right plans aren’t put in place.

How to Value an Estate for Inheritance Tax

Understanding how to value an estate for IHT is a key foundation to inheritance tax planning strategies. To calculate potential IHT, total your:

• Property
• Investments
• Cash
• Business interests
• Life insurance policies not held in a trust
• Valuables such as jewellery, vehicles or art
• Pensions (At the time of writing, pensions do not currently fall within your estate, but will do from April 2027).

From there, you can then deduct liabilities such as funeral costs, mortgages or other debts.

HMRC may request historical evidence upon your death to prove the final valuation, so it’s crucial to keep up-to-date, accurate records.

How Much is Inheritance Tax?

Here’s a brief overview of how much inheritance tax could be due on estates of rising value. The figures below are illustrative only, assuming current allowances for an individual, not a couple.

These figures show how quickly the numbers add up and how valuable the Residence Nil-Rate Band can be for keeping wealth within your family.

IHT Allowances, Exemptions & Reliefs

The Residence Nil-Rate Band is just one example of an allowance that can be used to reduce a taxable estate. However, every person has a host of other allowances, exemptions and reliefs that can minimise the amount of tax due.

Currently, the 2025 allowances, exemptions and reliefs are:

• Annual gift allowance: £3,000 per year
• Small gifts: Up to £250 per year
• Wedding/civil partnership gifts: You can give £5,000 to your children, £2,500 to grandchildren or £1,000 to anyone else.
• Regular payments out of income: If you make regular payments out of your income that don’t affect your standard of living, these payments are exempt from IHT.
• Potentially Exempt Transfers (PETs): Any payments that you make seven years or longer before your death are exempt from IHT.
• Business Relief / Agricultural Relief: Up to 100% for qualifying assets. (This will change in April 2026 to where assets exceeding £1million will qualify for only 50% relief).
• Charitable gifts: Fully exempt
• Quick succession relief: Reduces tax when assets pass through multiple estates in a short time.

To minimise your bill, it’s crucial, as part of any inheritance tax planning strategies, that these reliefs are leveraged to their full potential – like our client Mrs Taylor did in partnership with us.

Inheritance Tax Planning Strategies: Why It’s Important To Act Early

If you haven’t made a plan for IHT, now is a great time to do so. That’s because the most effective strategies, such as gifting or using trusts, rely on time. The cost of inaction can be severe, so implementing legitimate strategies to lower your tax burden and to ensure your estate is passed on according to your wishes is key.

While there will never be a one-size-fits-all approach to IHT planning, many strategies include a combination of using:

• Gifts: Giving assets to family members at least 7 years before death can help reduce taxes.
• Trusts: Discretionary or life-interest trusts help control asset use and keep them outside your estate.
• Life insurance in trust: These plans can cover IHT liabilities.
• Pension planning: Although laws are changing to include pensions in estates, they still offer tax benefits and should be considered.

Each of these options can be tailored to your goals and family situation. A good financial adviser will show you which combination offers the greatest benefit to you specifically.

Remember, even if you already have a plan in place, you still need to review it regularly. Many people only consider IHT when writing their will, but some plans may not remain appropriate over time.

Practical Steps to Inheritance Tax Planning

Keep Up With The News

Remember that reforms are ongoing; as Chancellors and governments change, so do inheritance tax rules. Stay informed about news and broader tax reform debates, particularly regarding inheritance tax thresholds and fairness.

For example, from 2027, pension pots will be taxed as part of estates under Rachel Reeves’s 2024 budget. She also proposed other changes and relief cuts, including in business and agriculture. Her next budget is scheduled for the end of November 2025.

Above all, remember that inheritance tax planning isn’t just about numbers. It’s about protecting what matters most. By taking advice and making a few well-timed steps, you could save your family hundreds of thousands of pounds and ultimately give you the peace of mind that everything you’ve built will benefit the people you love.

Plan now to protect your estate and loved ones. Speak with one of our Planners to minimise inheritance tax and secure your family’s future.

This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. 

The Financial Conduct Authority does not regulate estate planning or tax planning.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.