Inheritance tax planning (IHT) isn’t exactly a conversation starter at a dinner party—no one likes thinking about what happens after they’re gone. But here’s the thing: a little bit of planning now can make a massive difference to your loved ones in the future.
Without the right strategies in place, up to 40% of your estate could end up in the taxman’s hands instead of with your family. The good news? There are plenty of ways to legally reduce inheritance tax, ensuring more of your wealth goes to the people you care about. Let’s break it down into the key things you need to know about inheritance tax planning—without the jargon and without the doom and gloom.
Please be aware these changes were proposed in the Autum Budget (October 2024) and are subject to being enacted in law (second reading in the House of Lords on the 19 March 2025).
What is Inheritance Tax (and why should you care)?
Think of inheritance tax like a toll gate between your estate and your loved ones. Without careful planning, a significant chunk of your wealth could be taken before your family ever sees it.
In the UK, IHT applies at a rate of 40% on estates worth over £325,000 (known as the nil-rate band). However, if you leave your main home to direct descendants (including adopted, foster, stepchildren or grandchildren), your tax-free threshold can increase up to £500,000 thanks to the Residence Nil-Rate Band (RNRB).
The good news? There are plenty of exemptions and reliefs that can help reduce inheritance tax or even eliminate your IHT bill—if you know where to look.
Smart Ways to Reduce Your Inheritance Tax Bill
1. Make the Most of Tax-Free Allowances
One of the simplest ways to reduce your estate’s taxable value is to give gifts while you’re still alive. The key allowances to know about are:
- Annual Gift Exemption – You can give away up to £3,000 each tax year without it being counted towards your estate. You can even carry forward one year’s unused allowance.
- Small Gifts – You can make unlimited gifts of up to £250 per person. Although you cannot give a ‘small gift’ to anyone that you have used another allowance on.
- Wedding Gifts – Gifts to loved ones tying the knot are tax-free up to
£5,000 – for a child
£2,500 – for a grandchild
£1,000 – for anyone else
Gifting regularly can be a simple yet effective way to reduce your estate’s value while supporting loved ones when they need it most.
2. Put Your Money to Work with Trusts
Trusts can be an excellent way to control how and when your wealth is passed down while keeping it outside of your estate for IHT purposes. There are different types of trusts, each with their own tax rules, so getting expert advice is crucial to avoid any pitfalls.
3. Business and Agricultural Property Relief: Big Changes Ahead
For years, Business Property Relief (BPR) and Agricultural Property Relief (APR) have allowed business owners and farmers to pass down their assets with up to 100% tax relief. However, in the Autumn Budget 2024, one of the biggest changes that will come into effect from 6 April 2026, is that business and agricultural assets will qualify for a £1m allowance of 100% relief, and any value in excess of this will be subject to a reduced 50% relief rate.
If you’re in agriculture or own a business, now is the time to review your inheritance tax strategy to ensure your assets remain protected.
4. Gifting Money Regularly? It Might Be Tax-Free
If you regularly give money to help someone with their living costs — like a child, grandchild, or elderly relative — you might not need to worry about inheritance tax. There’s no set limit on how much you can give, as long as:
- You can afford the payments after covering your usual living expenses.
- The payments come from your regular monthly income (not savings or assets).
This is called ‘normal expenditure out of income,’ and it can include things like:
- Paying your child’s rent.
- Contributing to a savings account for a child under 18.
- Helping an elderly relative with bills or care costs.
You can also combine this with other allowances. For example, you could give your child £60 a month (£720 a year) and still use your £3,000 annual exemption in the same tax year — potentially gifting them up to £3,720 without triggering inheritance tax. Understanding these rules can make a big difference when planning to pass on your wealth. If you’d like tailored advice, we’re here to help.
5. Understanding the 7-Year Rule for Inheritance Tax
Thinking about giving a big gift? The 7-year rule could help you avoid inheritance tax. If you live for 7 years after giving a gift, it’s completely tax-free — unless it’s part of a trust. If you pass away within 7 years, the tax situation changes. Gifts made:
- In the 3 years before your death: Taxed at 40% (the full inheritance tax rate).
- 3 to 7 years before your death: Taxed on a sliding scale, thanks to something called ‘taper relief.’
Here’s how taper relief works:
Tax Rate Tapering – The Time Between Gifting & Death
- 3-4 years = 32% tax rate paid
- 4-5 years = 24% tax rate paid
- 5-6 years = 16% tax rate paid
- 6-7 years = 8% tax rate paid
- 7+ years = 0% tax rate paid (completely tax-free)
It’s worth noting that taper relief only kicks in if the total value of gifts given in the 7 years before your death exceeds the £325,000 inheritance tax threshold.
Planning your gifts carefully can make a big difference to what your loved ones receive. If you’d like to explore your options, we’re here to guide you through it.
Farmers’ Fury: Why the Autumn Budget Has Sparked Outrage
Farmers have long relied on Agricultural Property Relief (APR) to pass down their land tax-free, keeping family farms running across generations. The proposed changes, however, could lead to unexpected tax bills that force families to sell off land or assets just to cover the inheritance tax liability. For many rural businesses, land isn’t just an asset—it’s their livelihood. The proposed tax changes have sparked fears that small and medium-sized farms will be hit hardest, making succession planning even more critical.
If you’re a farm or rural business owner, now is the time to act. Speaking with an expert can help you navigate these changes and avoid costly surprises down the road.
Changes for non-UK domiciled individuals
From 6 April 2025, a new residence based system will be introduced for Inheritance Tax purposes. This means that assets held outside of the UK will be within the scope of inheritance tax if an individual qualifies as a long-term resident (defined as being UK resident for ten out of the previous 20 years). Individuals who leave the UK will remain within the scope of inheritance tax for a period ranging from three to ten years after their departure.
If this is going to effect you, now is the time to act. Speaking with an expert can help you navigate these changes and avoid costly surprises down the road.
How to Plan Effectively and Protect Your Family’s Future
1. Get a Will in Place (seriously, don’t put it off!)
Dying without a will means your estate will be divided according to intestacy rules, which could lead to higher IHT bills and assets going to the wrong people. Drafting a clear, legally binding will ensures your wishes are followed and your estate is structured in the most tax-efficient way possible.
2. Use Life Insurance to Cover Inheritance Tax
A life insurance policy written in trust can help cover inheritance tax, so your loved ones won’t need to sell assets. This type of policy pays out a tax-free lump sum on death, acting as inheritance tax cover.
3. Plan for Pension Changes
Pensions are currently one of the most tax-efficient ways to pass down wealth, as they usually sit outside of your estate for IHT purposes. However, from 2027/28, this could change. If pensions start counting towards IHT, reviewing your pension strategy now could save your family thousands.
Next Steps
Inheritance tax planning doesn’t have to be morbid, overwhelming, or left until the last minute. With the right strategies in place, you can ensure more of your hard-earned wealth stays in the family—not with HMRC. The key? Start early, take advantage of exemptions, and get expert advice.
As trusted advisors to business owners, farmers, and families across Cornwall and beyond, we’re here to help you navigate these changes and put a solid plan in place. Get in touch today to secure your legacy and protect your loved ones from unnecessary tax burdens.
