Updated Dec 2024
Inheritance tax (IHT) is the tax paid on lifetime chargeable transfers and the estate (property, money, and possessions) of someone who’s passed away. However, with careful planning and an understanding of the available reliefs and exemptions, it’s possible to minimise the amount of inheritance tax payable. Here are some of the more common ways to reduce exposure to that liability:
1. Nil Rate Band (NRB)
The Nil Rate Band is the threshold below which no inheritance tax is charged. Currently the first £325,000 of an individual’s estate is tax-free. This threshold has remained constant for several years, and any amount above this is typically taxed at 40%.
2. Residence Nil Rate Band (RNRB)
Introduced in April 2017, the Residence Nil Rate Band is an additional threshold available when a residence is passed on to direct descendants, such as children or grandchildren. This is on top of the standard Nil Rate Band and is set at £175,000 for the current tax year. This relief is only applicable when passing on a main residence, and is tapered away where the total estate exceeds £2M.
3. Spousal and Civil Partner Exemptions
Assets passed to a spouse or civil partner are exempt from inheritance tax, regardless of the amount. This means that if you leave your entire estate to your spouse or civil partner, there will be no IHT payable. Additionally, any unused Nil Rate Band can be transferred to the surviving spouse or civil partner, potentially doubling the NRB available on the second death.
4. Gifts and Potentially Exempt Transfers
Gifts made more than seven years before death are generally exempt from IHT. These are known as ‘Potentially Exempt Transfers’ (PETs). If the gift giver dies within seven years, the tax payable reduces on a sliding scale, known as ‘taper relief’.
5. Annual exemption
There are also annual exemptions that allow you to give away £3,000 worth of gifts each year without them being added to the value of your estate. This is known as the ‘annual exemption’. Where this relief was not used in the previous tax year, it can be used in the current tax year.
6. Small Gifts Exemption
Small gift exemptions also allow you to give up to £250 per person per year without it affecting your estate. This limit is per person, so you can make a number of such gifts to any number of individuals.
7. Gifts out of income
This relief allows individuals to make gifts from their surplus income without these gifts being added to the value of their estate for IHT purposes, provided certain conditions are met. To qualify, the gifts must be made regularly from income (not capital), and after making the gift, the donor must be left with enough income to maintain their usual standard of living.
8. Business Relief
Business Relief offers relief from IHT on business assets. This can currently be 50% or 100% relief, depending on the type of business assets, although changes to the rules reducing the relief will come into effect from 6 April 2026. This relief is designed to allow businesses to be passed on without the need for selling assets to cover IHT bills.
9. Agricultural Relief
Similar to Business Relief, Agricultural Relief allows for some agricultural property to be passed on either tax-free or with a reduced tax bill. This can include land or pasture that is being used to grow crops or to rear animals intensively. The rules are expected to change from 6 April 2026 limiting the amount of relief available.
10. Charitable Donations
Any gifts left to charity are exempt from IHT. Furthermore, if you leave at least 10% of your net estate to charity, the IHT rate on the rest of your estate may be reduced from 40% to 36%.
Conclusion
Inheritance tax planning is a complex area that requires careful consideration and, often, professional advice. By understanding and taking advantage of the available reliefs and exemptions, it’s possible to significantly reduce the IHT burden on your estate. Remember, early planning is key to maximising these opportunities.
Do get in touch with our IHT tax specialists to explore how these strategies can be tailored to your specific circumstances and ensure your estate is as tax-efficient as possible.
