Inheritance Tax Planning

What is inheritance tax?

Inheritance tax is a tax on the estate of someone who has passed away. This includes their property, money and all possessions they had during their lifetime at death. Inheritance tax is payable at 40% above the nil rate band, which we will discuss.

The tax is paid by the estate before the assets are then distributed to that person’s beneficiaries.

What are the individual and joint inheritance tax allowances?

Each individual has a nil rate band of £325,000. So, up to £325,000, there is no inheritance tax liability.

Above that you are taxed at 40%. For residents, a couple’s main residence increases by £175,000. This means a married couple can leave a property valued up to £1 million to their children, as long as both their nil rate and residential nil rate bands are still available to them.

How do you reduce inheritance tax on property?

Well, there is a main residence allowance. If you can also use your full residence nil rate band, you can then gift your property valued up to £1 million to your children or your grandchildren. They need to be direct descendants.

You can also currently give away lifetime gifts. If you give away property, you need to survive seven years for full exemption, as there is taper relief. So, if you give away an amount of money and die within seven years, Inheritance Tax (IHT) will be payable.

You can also downsize or gift proceeds, so downsizing relief may keep the nil band intact. At the moment there are lots of changes coming from the government. They’re looking at different things like pensions for inheritance tax, so this is a constant-moving beast [information correct at the time of recording in September 2025].

How do the rich avoid inheritance tax?

There are all sorts of instruments that they can use. A trust would be a big one. You’ve got discretionary gift trusts or discretionary loan trusts. Those would be quite popular with wealthier customers.

You’ve got business relief – where certain business assets are exempt up to 100% – and agricultural relief. Some farms can get up to 100%. They’ve changed the rules on farms, so it’s best to speak to a specialist to look at these sorts of things.

Another option is charity donations. If you donate 10% of your estate, the inheritance tax rate will be reduced from 40% to 36%.

How do you reduce inheritance tax with a trust?

With a discretionary gift trust, you can move an amount of money. You can still have access to that money, but the tax relief begins the moment you put it into trust for your family.

If you survive for seven years after the transfer, the asset and any growth it experiences will be exempt from Inheritance Tax (IHT). This makes it an attractive option for individuals with substantial assets who are approaching an age where IHT becomes a concern.

The main thing is to get advice as early as possible.

Does a deed of variation reduce inheritance tax?

A deed of variation is a variation on the will. It needs to be made within two years of the death of the party involved. For example, the beneficiaries can all agree that a son gifts his inheritance directly to the grandchildren of the deceased.

That deed of variation then moves the IHT bill from the son to the grandchild – so you’re moving the Inheritance Tax (IHT) from one person to the next.

Can I use equity release to avoid inheritance tax?

Equity release is later life lending against a property. It’s not going to directly reduce your inheritance tax bill, but the loan will reduce the estate. Therefore, you really need good advice.

This sort of thing needs to be used carefully, because the interest compounds. So although you’re borrowing against your estate and reducing what can be assessed for inheritance tax, the amount of interest that compounds on that might offset it in the end.

Should I get married to avoid inheritance tax?

Any unused allowances that your partner may have at death can be transferred, giving you a total of £650,000. So, a married couple has £650,000 that is Inheritance Tax (IHT) free; anything above that will be taxed at 40% unless it is used for a property – specifically their main home.

Can I buy my parents’ house to reduce inheritance tax? And can I give my house away to reduce inheritance tax?

Buying your parents’ house may seem like a good idea, but there’s no automatic inheritance tax exemption.

You could be looking at the seven-year taper again if they’ve technically gifted you the house or you’ve bought it from them. This applies if they’re going to remain in the property – for example, if you’re trying to avoid care costs or anything like that.

The parents would need to be paying your market value rent to live there. It’s the same with gifting your home – you need to pay market rent otherwise they still assess it as part of your estate.

How much can I give away to avoid inheritance tax?

There are quite a few different ways to gift money with different rules. Again, they are looking at these and trying to reassess them, but I can tell you what is available today [September 2025].

You have an annual exemption, so you can give away £3,000 per tax year without it being added back into your estate for inheritance tax. Any unused exemption can be carried forward one year only – so you can gift up to £6,000 in a year if you haven’t used the previous year’s £3,000.

There’s a small gift exemption where you can give £250 per person, per tax year to as many individuals as you like, provided they haven’t already received the £3,000 exemption above.

There are also gifts for marriage or civil partnership. If you get married, your parents can gift you up to £5,000 without inheritance tax, grandparents £2,500 and anyone else £1,000.

You’re also able to make gifts from income. If you make regular gifts from your surplus income, they’re immediately exempt from IHT as long as they don’t affect your standard of living.

This is quite useful for people with a large income. You’ve got potentially exempt transfers with pets. Again, these trigger that seven-year rule, so it’s really best to speak to a tax specialist or an Independent Financial Adviser to work out the best way to do this.

Can executors donate to charity to reduce inheritance tax?

You can donate to charity to reduce inheritance tax. If you donate more than 10% of the estate, the IHT rate then reduces from 40% to 36%.

Can I avoid inheritance tax with a SIPP (self-invested personal pension)?

Very importantly, the rules on pensions are changing. At the moment, they do not form part of your estate. However, from April 2027, your pension pot will be included in your estate for inheritance tax assessment.

Currently there’s no IHT on your SIPP if you die before 75. After 75, your beneficiaries will pay income tax, but no IHT [information correct at the time of recording in September 2025]. The rules on this changed in April 2027, which is triggering a lot of activity and many questions about what to do with pensions. People are taking tax-free cash and buying annuities, because that then removes it from their estate.

Can inheritance tax be reduced with a Limited Company?

Yes, inheritance tax can be reduced with a Limited Company. Shares in qualifying trading companies receive business relief, which can be up to 100% after two years. Pure investment companies don’t usually qualify, but business relief does exist for 100% unlimited companies.

Does a joint bank account avoid inheritance tax?

Only the deceased’s share counts towards their estate, so if their partner is still alive, that should pass to them tax-free. Only on the second death would it count towards the estate.
For example, if you and I owned a bank account together and I passed away, the joint account would become yours.

Anything else to consider with inheritance tax planning?

With IHT, it’s always important to get professional advice, because tax laws and exemptions change all the time. For instance, with the pension changes in 2027, people are now planning ahead and asking, “Should we take the tax-free cash?” or “do we get an annuity, because that’s going to take it out of the estate?”

Gifting early is always very important, because of the seven-year rule resets, but they’re even looking to potentially change that at the moment. So, if you’re considering gifting, probably best to do that sooner rather than later.

Things like life insurance should be considered. A lot of policies wouldn’t be set up in trust, but it’s quite a simple process. If it’s in trust, it pays out IHT-free. If it’s not in trust, it falls into your estate.

So just a few things, but always get professional advice.

The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.

The information contained within this article was correct at the time of publication but is subject to change.