Inheritance tax is one of the most talked-about taxes in the UK and, for many families, one of the most avoidable. Yet the majority of people who will be affected by it do nothing until it is too late to make a meaningful difference. With thresholds frozen until at least 2030 and rising property values pulling more estates into scope every year, the number of families facing a 40% tax bill on their wealth is growing.
The good news is that with the right planning, there is a great deal that can be done to reduce the bill, or in some cases eliminate it entirely. The earlier you start, the more options you have.
Understanding where you stand
Inheritance tax is charged at 40% on the value of your estate above the nil-rate band, which is currently £325,000. If you are passing your main residence to direct descendants such as children or grandchildren, an additional residence nil-rate band of £175,000 applies, bringing the combined threshold to £500,000. For married couples and civil partners, both allowances can be combined, meaning up to £1 million can be passed on without any inheritance tax being due.
Once you factor in property values in areas like North London, however, it becomes clear why so many families are now caught. An estate worth £750,000 that does not take advantage of available planning could face a bill of up to £100,000. That is money that could have stayed with your family.
Start with a valid Will
No amount of estate planning works properly without a valid Will in place. Without one, the intestacy rules decide who inherits, which often produces outcomes that are very different from what you would have chosen and can also push your estate into a higher tax position by failing to use the available allowances.
A properly drafted Will allows you to direct specific assets to specific beneficiaries, set up trusts on death, leave gifts to charity, and make sure your spouse or civil partner can use the spousal exemption fully. It should be reviewed every few years, and certainly after any major life event such as a marriage, divorce, or significant change in the value of your estate.
Lifetime gifting and the seven-year rule
One of the most straightforward planning tools is gifting assets during your lifetime. Under HMRC rules, gifts made to individuals become fully exempt from inheritance tax if you survive for seven years after making them. These are known as Potentially Exempt Transfers.
There are also annual exemptions you can use without any seven-year clock running. Each tax year, you can give away up to £3,000 free of inheritance tax, and this allowance can be carried forward one year if unused. Small gifts of up to £250 per person can be made to any number of individuals, and gifts made out of surplus income, rather than capital, can also be exempt if they form part of a regular pattern.
A common pitfall to be aware of is the gift with reservation of benefit. This typically arises when parents transfer their main residence to their children but continue to live in the property. HMRC treats the home as still part of the parents’ estate for inheritance tax purposes, because the donor has not truly given the asset away. To avoid this, the parents would need to pay a full market rent to the children, which itself creates further tax considerations. Gifts of this kind almost always need professional advice before they are made.
The key is to start early and keep records. HMRC will want to see a clear account of any gifts made in the seven years before death, so documentation matters. Our taxation team can help you put a structured gifting plan in place that uses these exemptions effectively year on year.
Making use of trusts
Trusts can be a powerful way to move assets out of your estate while retaining some control over how they are eventually distributed. When assets are placed into a trust, they are no longer considered part of your personal estate for inheritance tax purposes, provided the structure is set up correctly and the rules are followed.
There are several types of trust available, each with different tax treatment. Discretionary trusts, for example, give trustees flexibility over who benefits and when, making them useful for protecting assets across generations.
It is important to understand that gifts into most trusts are treated as chargeable lifetime transfers. This means that any value above the nil-rate band entering the trust can attract an immediate 20% inheritance tax charge, with a further charge possible if the donor does not survive seven years. Trusts also face periodic ten-year and exit charges. None of this makes trusts a poor option, but it does mean the structure must be planned carefully.
There is also a separate reduced inheritance tax rate worth knowing about. Where 10% or more of the net estate is left to charity, the tax rate on the remainder of the estate that would otherwise be taxable falls from 40% to 36%. For families with charitable intentions, this can be a meaningful saving while supporting causes that matter to them. Trusts have become subject to closer scrutiny in recent years and the rules are detailed, so taking proper advice before proceeding is essential.
Business property relief and agricultural property relief
If you own a business or shares in a qualifying trading company, Business Property Relief can reduce the inheritance tax on those assets by 50% or 100%, depending on the type of asset. Agricultural Property Relief works in a similar way for farming assets.
Following the Autumn Budget 2024, the rules changed. From April 2026, the first £1 million of combined agricultural and business assets will continue to attract 100% relief, but the rate drops to 50% on anything above that. If you own a business or have investments in qualifying assets, it is worth reviewing your position in light of these changes, since what applied before may no longer give the full protection you expected.
Pensions and the upcoming 2027 changes
Historically, pension funds have sat outside your estate for inheritance tax purposes, making them a valuable way to pass on wealth to the next generation. From April 2027, however, most pension funds will be brought into the scope of inheritance tax, which represents a significant shift in estate planning strategy.
If you have a substantial pension, now is the time to review how it fits into your overall estate plan. This might mean adjusting the order in which you draw down different assets, reviewing your pension nominations, or exploring other tax-efficient ways to hold and pass on wealth. Acting before the 2027 deadline gives you options that will not be available once the rules change.
Life insurance written in trust
Life insurance held in trust is not counted as part of your estate, which means the payout goes directly to your beneficiaries without being subject to inheritance tax. A whole-of-life policy written in trust can be used specifically to cover a known or anticipated inheritance tax liability, ensuring your family has the funds to settle the bill without needing to sell assets.
This is not a way of reducing the tax itself, but it is a practical way of making sure the people you leave behind are not forced into a rushed property sale or the liquidation of investments to meet an HMRC deadline.
Start planning before it feels urgent
The families who end up with the largest inheritance tax bills are almost always the ones who delayed. The seven-year rule requires time to work. Trusts need to be structured carefully and in advance. Pension planning needs to happen before 2027. Every year that passes without a plan in place is a year of gifting allowances unused and options closing down.
At Taylor Associates, we help individuals and families review their estate position and put practical steps in place, including reviewing how rental properties, business interests and investments are held. If your estate includes buy-to-let property, it is also worth understanding how rental income tax interacts with your broader tax position.
If you are not sure whether your estate currently falls above the threshold, or you want to understand what can be done to reduce the bill, get in touch with our team. The earlier the conversation happens, the more we can do.
The information in this blog is for general guidance only. Tax rates and legislation change, including at the start of each new tax year on 6 April, and you should always take professional advice before making any decisions about your tax position. Contact us for help.
