Inheritance Tax

Inheritance Tax is a relatively small, but growing, revenue raiser for the Government, and one of the less popular taxes. It was introduced in 1984 to replace the even less popular Capital Transfer Tax (CTT), which was in turn introduced in 1974 to replace Estate Duty and was intended in the words of the then Chancellor, Dennis Healey, "to make the pips squeak". IHT is now 40% but is often paid at a reduced rate due to the exemptions listed below.

Act now

The All Party Parliamentary Group (APPG) has recommended the abolition of Inheritance Tax (IHT) and its replacement by a tax of around 15% on nearly all transfers of wealth. So, if you are thinking of making a gift it may be advisable to give funds away now rather than later.

Use the Inheritance Tax (IHT) reliefs and allowance ... while they are around

Seven-year rule for Potentially Exempt Transfers (PETs) - gifts made more than seven years before death are exempt from IHT.
There is an unlimited inter-spouse exemption so long as the spouse receiving the gift is UK domiciled (UK LTR after 5 April 2025).
Nil Rate Bank (NRB) - £325,000
Residence Nil Rate Band (RNRB) - 'applicable to' property - £175,000 but it tapers down as the estate rises above £2m.
Transferable NRB and RNRB of a deceased spouse.
Per person - £250 per year.
Per year - £3,000 per year.

Marriage - £5,000 per parent, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
BPR is scheduled to be restricted after 5 April 2026 , 100% relief will only be available up to the first £1m, and after that half the normal rate will apply to what was previously completely tax-free.
Agriculture Property Relief (APR) - 100% relief from IHT is available for the first £1m of farmland or woodlands, and the rate on death is only 20% thereafter, but there are conditions to be met if the land is only rented. After 5 April 2026 only the first £1m of agricultural property will remain IHT free. Thereafter half the normal rate will apply.
Normal expenditure out of income - this is a complex exemption where HMRC's view may not accord with a strict reading of the law.
Gifts to charities or political parties.
Pensions - it is proposed to tax undrawn pensions after 5 April 2027.

Insure against IHT

Taking out Life Insurance written under trust to fund IHT can be more efficient than paying annual fees to maintain a complex structure, especially if IHT will only bite on the second death of spouses.

Financial advice should be sought.

Make a Will and update your Will

Make a Will!

Regularly reviewing and updating Wills as financial and family circumstances change and tax rules evolve is the best way for all individuals to manage their family’s IHT exposure.

Make sure the Will can be found. You can register your Will at the National Will Registry.

Curriculum mortis

Don’t leave a problem for your heirs. Dying intestate can cause serious problems for your heirs not limited to tax problems.

Make a Lasting Power of Attorney to allow your loved ones access to funds if you become incapacitated.
Make sure your Executors know where your Will and Power of Attorney are.
Make sure your Executors know what you own.

But Beware...

The problems with digital assets! In order for your Executors to gain control over your digital assets they must know your passwords and codes.

Don't forget the residence nil rate band

£175,000 but tapers as the estate increases above £2m
Only applies on transfers to ‘direct descendants’
Does not apply to other IHT ‘able transfers’ e.g. gifts within seven years of death or into trusts.

Bare trusts

One alternative to a classic private trust is a bare trust, or nominee arrangement.

This enables the seven-year PET ‘clock’ to start while the donors, for example parents, can continue to operate the assets practically so long as the donees, who are the owners agree.

IHT and Pensions

From 6 April 2027

The Government proposes that, from 6 April 2027, the value of any unused pension funds and pension benefits paid on death be included in the value of your estate for IHT purposes. The IHT allowances and other exclusions continue to apply across the whole. The pension fund will then settle its pro rata share of the total IHT direct to HMRC.

It is intended that this applies to both UK registered and non-UK pension schemes.

The proposal is open to consultation, although the Government has said it is only consulting on the mechanics of personal representatives and pension scheme administrators collaborating in accounting for the IHT due. It is not consulting on the principle of charging IHT on pension funds.

After the IHT has been settled, the balance pension funds can be distributed, being tax-free or taxed as income as now. You will find more information in our Insight.

You should consider whether you want to review your estate/succession planning in light of the proposed pension IHT charge.

If your pension fund remains primarily for your own retirement security, then the IHT change does not affect this.

On the other hand, if you are deliberately putting off drawing on your pension funds, so as to provide an efficient inheritance, you will have to review this strategy in the context of your overall affairs. You might consider taking withdrawals in your lifetime, especially any tax-free cash, and gifting that now, IHT free if you live another 7 years.

If age 75 or over, also consider drawing pension income and giving away the net proceeds. While the income withdrawals will be subject to Income Tax in your hands, if the net income is demonstrably surplus to your income needs, your gifts will not be subject to IHT.

IHT on UK property owned by offshore entities

UK residential property is now unavoidably subject to IHT, no matter how owned.

Invest in IHT-efficient assets

IHT is payable on the chargeable value of your estate at death above £325,000. However, several types of assets qualify for more relief from IHT than others. Consider realising your current assets and reinvesting in private trading and property businesses, agricultural assets or woodlands.

Consider a trust?

Consider a Discounted Gift Trust or a Gift & Loan Trust which allows the gifting of a lump sum into a trust whilst retaining a lifelong income.

IHT relief on charitable gifts

If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the nil rate band) to charity could save your family IHT. A reduced rate of IHT of 36% (rather than 40%) applies where 10% or more of the net estate is left to charity.

This will reduce the cost of your gifts to other beneficiaries of your estate. The charitable gifts should be specified as a percentage of your estate, rather than a fixed sum or specific asset, to ensure that changes in asset values do not cause the eventual gift to fall below the 10% threshold.

Have trusts had their day?

A trust used to be a tax efficient vehicle for UK individuals. However, over the years changes to the UK tax system mean that the tax advantages of trusts are now much less than a generation ago. This is especially true following the October 2024 Budget. Consider some of the alternatives to trusts:

Personal ownership
Bonds – UK and offshore
Open Ended Investment Companies (OEICs)
Private Unit Trusts (PUTs)
Protected Cell Companies (PCCs)
Family Investment Companies (FICS)
Tax privileged investments
UK Reporting Funds
Offshore Funds.

The timing of creating a trust can have significant tax implications and bring disclosure obligations.

Trusts can still be tax-efficient in the right circumstances and for the right person. For example, the use of trusts in Wills carry Inheritance Tax advantages, and trusts settled by non-Long Term Resident settlors who will not become UK-resident only Inheritance Tax advantages but also Income Tax and CGT benefits for UK beneficiaries.

Speak to your tax adviser as to whether settling a trust may be appropriate for your circumstances.