Managing Inheritance Tax (IHT) liabilities is one of the bigger challenges many high-net-worth taxpayers face when looking to protect their interests and pass wealth to the next generation.
With IHT reform set to take effect in 2026 and with the potential of more changes to follow, it’s important that your finances are in order and you look at the different ways you can keep your IHT liabilities as low as possible.
Why organising your finances is important
Having a clear picture of your estate, including your cash holdings, shares and assets, allows you to make the best decisions.
It helps you plan for any circumstantial changes, changes in the economic climate and any tax reform announced by the Government.
IHT has proven a popular avenue thus far for Chancellor Rachel Reeves as she attempts to balance the Government’s books and abide by Labour’s own tight fiscal rules and manifesto to not increase taxes on working people.
These included a continued freeze on the IHT nil-band rate, the inclusion of death benefits and unused pensions as part of your estate’s value and changes to Business Property Relief (BPR) and Agricultural Property Relief (APR).
The 2025 Autumn Budget takes place on 26 November and while it’s unclear what will happen at this stage, further IHT reforms are not out of the question.
When am I liable to pay Inheritance Tax?
Estates in the UK become liable for Inheritance Tax if they surpass the IHT nil-rate band of £325,000.
IHT is then charged at the standard 40 per cent rate on the outstanding value of your estate.
However, there is also the Residence Nil-Rate Band (RNRB) to consider, which is an IHT tax-free allowance of £175,000. RNRB can apply to individuals who owned their property and have left this to lineal descendants such as your children and grandchildren.
It means this allowance, alongside the £325,000 nil-rate band, means your tax-free threshold for IHT could increase up to £500,000.
What measures can I take to protect my finances and estate?
Mitigating IHT liabilities can be challenging, but there are ways you can reduce your liability to protect your finances, assets and estate.
The easiest way is to gift assets. Gifting means you reduce the value of your estate, thereby reducing the likelihood of receiving an IHT bill.
One option to consider is your annual gift allowance, which allows you to gift a certain amount of money or possessions tax-free in a tax year.
Currently, the gift allowance is £3,000 before it becomes taxable and you are able to gift this amount each tax year.
Should you not use the whole gift allowance in a tax year, it can be carried over into the next year.
Other ways to gift include giving someone up to £250 per year. This applies to each person you gift money to and is not subject to IHT and does not count towards your £3,000 personal gift allowance.
You can also gift money from your income as long as it doesn’t impact your lifestyle and leave unlimited donations to charity, as this doesn’t fall under IHT liability.
In addition to this, you also need to be aware of the seven-year rule, which can make certain assets exempt from IHT.
However, this will only apply if you are living seven years after giving the gift to the intended beneficiary.
However, if you pass away during this seven-year period, the gift will be added back into the value of your estate.
If any IHT is due, the amount paid is determined by the gift’s age and works on a taper relief.
The taper relief works on a decreasing scale, meaning the older the gift, the more reduced the rate becomes. The relief starts at 40 per cent for gifts given up to three years before you pass away.
For between three and four years, the rate reduces to 32 per cent. The rate continues to drop by eight per cent each year until the seven-year threshold is reached and all IHT liability is removed.
As well as gifting, you can also place assets into a trust, which essentially transfers those assets out of your estate.
Trusts protect your intended beneficiaries’ inheritance and reduce the value of your estate, meaning your IHT liabilities decrease.
When you create that trust, you need to appoint trustees to manage and distribute the contents.
However, it is important to remember that there are different trusts available, such as a bare trust and a discretionary trust, which will have their own fees and potential tax implications.
The value of speaking with expert accountants
If you are in the process of organising your affairs and estate, understanding your finances and the potential IHT liabilities can help you plan and prepare effectively.
We can explain IHT in detail, help you plan and give you the tools to build a clear picture of your finances.
