Nine tips for inheritance tax planning

In the 2023-24 financial year, HMRC received more than £7.5bn in death duties. Inheritance tax was originally designed to only apply to the rich, but now a much greater proportion of the population is affected, after the £325,000 threshold above which the tax is paid.

So if you’re feeling daunted at the prospect of managing an inheritance tax liability, you are certainly not alone. But if you’re wondering how to plan your legacy, I think it more important to think about what you want to achieve and your long-term objectives rather than focusing solely on tax. You won’t want to tie your assets up only to discover you can’t use them to fund later-life care, for example.

Here are the most important things to consider.

Nine inheritance tax tips

1. Make a will and keep it updated

If you haven’t already done so it is vital that you make a will. A will forms a major part of your estate planning, as at the very least it will make sure that your estate is distributed in line with your wishes. If you do not make a will, your assets will be distributed according to intestacy rules and it might create IHT complications – even a direct liability - that would be otherwise avoided.

2. Calculate the value of your estate

For some families this will be straight-forward, but there can be complications. Where assets are held jointly with others, for instance, where gifts have been made in the past seven years, or where there are business assets.

For higher value estates (above £2.3 million) it is important to note that you would normally lose all of the residential Nil-Rate Band allowance. There may be things you can do to keep hold of this valuable exemption but unless you know the value of your estate, you could remain unaware of this issue.

3. Know your inheritance tax allowances and reliefs

Gifting rules allow £3,000 to be gifted each year free of inheritance tax; smaller gifts of £250 per person each year are allowed on top of this too, as long as they aren't to the same people. For any gifts above this amount, the seven-year rule applies. This means you must survive for at least seven years until these gifts are deemed outside your estate and therefore free from any potential IHT. If you die during the seven-year period, IHT is payable on a reducing scale.

4. Consider using trusts

Previously, trusts have been effective tools to pass on assets and mitigate IHT. However, rule changes have now brought further tax burdens on trusts and they are not as attractive as they once were. But in the right circumstances, they can offer some effective planning.

5. Look at protecting your inheritance tax liability

It is possible to take out a life assurance policy that can protect against your IHT liability. As long as this policy is written into trust, it will not form part of your estate – leaving your executors in a position to meet the IHT bill. These policies are usually ‘whole of life’ and payable on the second death for spouses, as generally, IHT is only payable when both have passed away.

They can allow you to avoid having to ‘gift’ parts of your estate, so you can retain control over your wealth. However, they can be expensive and the policy itself is regarded as a gift to the trust. This means IHT will be due on the value of the policy, but it is likely to be much lower than the liability for the estate as a whole.

6. Give money to charity in your will

Gifts to qualifying charities are exempt from IHT regardless of their value. In addition, if you give 10% or more of your net estate to charity, this will effectively reduce the overall IHT rate on your estate from 40% down to 36%. For many families with excess wealth, this can be an ideal way of reducing the tax burden while doing good.

7. Set up a Family Investment Company (FIC)

Family Investment Companies (FICs) can also be helpful in IHT planning, and have become more popular in recent years as rules surrounding trusts have changed. FICs can provide an excellent way of passing assets through the generations, as shareholders can be varied at any time. The downside is that they are taxed as a normal business under company law so large distributions, particularly in the early years, can be quite costly in the hands of the recipient. Successive governments may also change the rate of tax applicable and this can make them less attractive.

8. Invest into an AIM portfolio

AIM portfolios attract Business Relief (BR) and, unlike a gift into a trust or to an individual, the assets are deemed to be free from an IHT liability after two years. However this rule is due to change on 6 April 2026, with business relief only being applied at 50%, making the effective IHT rate 20%.

One advantage of AIM portfolios is that the owner of the assets still has complete access to them if needed in the future. You can also invest using your ISA allowance, which can help with any capital gains tax if a withdrawal is needed.

These portfolios are used predominantly by people in the latter stages of their life who take advantage of the shortened timescales involved. However, these types of investments carry a relatively high risk.

9. Spend all your money!

Spending any money above the nil-rate and residential nil-rate bands seem like the most obvious solution. However, this is simply not viable for most families, as we all need savings for unforeseen events including long-term care needs. Just owning your own home can use up most of the available allowances, so giving away all of your other assets is not a good idea.

There are many different methods of completely mitigating or reducing your inheritance tax bill. However, many of these may result in you losing control and access to your money, which is not advisable, particularly in your younger days.

That’s why it’s always important to focus on your long-term needs and those of your family. As a rule, you should consider your own needs first before conducting any serious inheritance tax planning.

When should I seek inheritance tax advice?

It's never too early to start planning, though most people begin thinking about IHT after the age of 55. Working with a good financial adviser and/or solicitor is important to fully explore your different options. Some couples decide to do nothing in their younger years, or just start the beginnings of an effective IHT reduction strategy. In many cases a variety of methods may be used to help mitigate IHT over the years. The most important thing is to be aware of your current situation and the options open to you in the longer term.

Inheritance tax can be an emotional subject, but there is support available. Have a conversation with a skilled financial planner to understand your potential tax liability and they can help you take the most appropriate steps to deal with it effectively.