Inheritance Tax (IHT) affects thousands of families each year, with estates valued over £325,000 liable to pay 40% tax on the excess. If a main residence is passed to children or grandchildren, an additional £175,000 allowance (known as the residence nil-rate band) may apply, bringing the total potential tax-free threshold to £500,000 per person. However, with both allowances frozen until at least 2030 and changes on the horizon, early planning is now more important than ever.
At Elizabeth Middleton Solicitors, we specialise in navigating the complexities of inheritance tax, providing expert support in Wills, Lasting powers of attorney, probate, and equity release.
Understanding the Basics of Inheritance Tax
Inheritance Tax is a tax on the estate (property, money and possessions) of someone who has passed away. It is charged at 40% on the value of the estate above certain thresholds. However, if at least 10% of the estate is left to charity, the rate may be reduced to 36%. Every individual has a Nil-Rate Band (NRB) of £325,000; this portion of their estate is tax-free. Any unused allowance can be passed on to a surviving spouse or civil partner, effectively doubling the threshold to £650,000.
Additionally, a Residence Nil-Rate Band (RNRB) of £175,000 applies when the family home is passed to direct descendants (such as children or grandchildren). This allowance tapers for estates over £2 million. Crucially, transfers between spouses or civil partners are completely exempt from IHT, allowing many couples to pass on up to £1 million tax-free with careful planning.
7 Inheritance Tax Planning Strategies
Planning ahead can make a significant difference when it comes to reducing Inheritance Tax.
1. Lifetime Gifting & the Seven-Year Rule
One of the simplest ways to reduce your estate’s value is to give away assets during your lifetime, such as:
- Annual Exemptions — Each individual can give up to £3,000 per tax year without it counting toward their estate. If the full amount isn’t used, it can be carried forward to the next tax year, allowing up to £6,000 of exempt gifts in one year. You can also give small gifts up to £250 per person each year, provided they haven’t received part of your £3,000 allowance.
- Seven-Year Rule — Larger gifts fall under the Potentially Exempt Transfers (PET) rule. If the donor lives for seven years after making the gift, the value falls outside of their estate. If they pass away within that period, a taper relief applies, reducing the IHT rate from 40% to 8%, depending on how many years have passed.
- Normal Expenditure — Gifts made regularly from surplus income, such as paying a grandchild’s school fees, can be IHT-exempt without the seven-year rule, provided they don’t affect your standard of living.
2. Trusts
Trusts are a powerful tool for reducing your taxable estate while maintaining a level of control.
- Discretionary trusts — By placing money or assets into a trust, they may fall outside your estate after seven years, provided you no longer benefit from them directly.
- Discounted Gift Trusts — These allow you to “gift” capital into a trust while receiving a fixed annual income for life. A portion of the trust’s value may be considered outside your estate immediately, with the remainder falling out after seven years. We advise that you seek independent Financial Advice from an authorised Financial Advisor.
3. Charity & Religious Bequests
- Lower Tax Rate — By leaving 10% or more of your net estate to a registered UK charity, you can reduce the overall Inheritance Tax rate on the rest of your estate from 40% to 36%.
4. Business & Agricultural Relief
- Up to 100% Relief — Qualifying business assets or agricultural property can be passed on free from IHT, offering substantial tax savings. The relief typically applies to family businesses, farms, and shares in unlisted companies. However, from April 2026, the government proposes to cap full relief at £1 million, with only 50% relief applying to amounts above that threshold. These rules are complex and subject to interpretation, therefore, expert legal guidance is essential in these cases.
5. Life Assurance in Trust
A whole-of-life insurance policy, when written into trust, can provide funds specifically to cover your IHT liability.
- In Trust = Outside Estate — This means the payout won’t increase your taxable estate and can be paid out quickly to cover the tax bill.
- Act Before 2025/2027 — With upcoming changes to how financial assets are treated in estates, setting this up early may avoid being caught out by new rules.
6. Pension & ISA Planning
- Pensions — Pensions are currently outside of your estate for IHT purposes, but from April 2027, some pension funds may be included. To plan ahead, ensure you have completed an ”expression of wish (EOW) form” or use discretionary trusts where appropriate.
- ISAs — These are not automatically exempt from IHT, but transferring to a spouse or gifting the value in life can help reduce liability.
7. Non-Residency Planning
- Expatriation — Individuals who have been non-UK domiciled for at least 10 years may be able to avoid UK IHT entirely. However, this is a complex matter, making it vital to consult a solicitor with deep expertise in estate planning.
Key Inheritance Tax Pitfalls
While there are several effective ways to reduce Inheritance Tax, it is just as important to avoid common mistakes that could unintentionally increase your estate’s liability. These include:
- Gifts with Reservation — If you gift an asset, such as a property, but continue to benefit from it (e.g. living rent-free in the home), HMRC will treat it as still part of your estate. These are known as “gifts with reservation of benefit” and can undo your planning efforts.
- Misuse of Trusts — With changes that came into effect from April 2025, including amendments to the Pre-Owned Asset Tax (POAT) and trust residence rules, certain trust arrangements may no longer offer the same level of protection they once did. Legal advice is crucial to avoid unexpected tax liabilities.
- Tapering of Residence Nil-Rate Band — Estates valued above £2 million begin to lose the additional £175,000 residence nil-rate band, making planning around asset value vital.
How Elizabeth Middleton Solicitors Can Help
At Elizabeth Middleton Solicitors, we provide clear, expert advice to help you plan effectively for Inheritance Tax. Whether you are drafting a will, setting up trusts, creating Lasting Powers of Attorney, or exploring equity release, we will ensure your estate is structured to protect your legacy and make the most of available allowances.
Serving clients throughout Reading, Henley-on-Thames, Basingstoke, Maidenhead, and Newbury, we are here to support you with personalised advice as tax rules change.
Contact us today for a confidential consultation and expert guidance tailored to your needs.
