UK Inheritance Tax Planning Guide 2025
Inheritance Tax (IHT) can take 40% of your estate above the tax-free thresholds, but with proper planning, you can significantly reduce or eliminate this tax burden. This comprehensive guide covers all aspects of UK inheritance tax planning, from basic allowances to advanced strategies that can save your family hundreds of thousands of pounds.
📊 UK Inheritance Tax Overview 2024/25
IHT Tax-Free Thresholds
Nil-Rate Band
Per person (frozen until April 2028)
Residence Nil-Rate Band
When leaving main home to direct descendants
Combined Allowance (Couple)
Maximum for married couples/civil partners
IHT Rate
Standard Rate: 40% on value above thresholds
Reduced Rate: 36% if 10%+ left to charity
💰 IHT Calculation Examples
Single Person Estate: £500,000
Estate Value: £500,000
Less Nil-Rate Band: £325,000
Less RNRB: £175,000
Taxable Estate: £0
IHT Due: £0
Single Person Estate: £800,000
Estate Value: £800,000
Less Total Allowances: £500,000
Taxable Estate: £300,000
IHT Due: £120,000 (40%)
Couple Estate: £2,000,000
Combined Estate: £2,000,000
Less Combined Allowances: £1,000,000
Taxable Estate: £1,000,000
IHT Due: £400,000 (40%)
🎯 10 Proven IHT Reduction Strategies
1. Annual Exemption Gifts
Allowance: £3,000 per person per year
Benefit: Immediate removal from estate, no 7-year rule
10-Year Saving: £30,000 per person (£60,000 for couples)
Plus: Can carry forward one year if unused
2. Small Gifts Exemption
Allowance: £250 per recipient per year
Strategy: Give £250 to multiple people (children, grandchildren)
Family Saving: £250 × 6 recipients × 20 years = £30,000 estate reduction
3. Regular Gifts from Income
Allowance: Unlimited if from surplus income
Requirements: Regular pattern, from income not capital, doesn't affect lifestyle
Example: £1,000/month gifts = £12,000 annual estate reduction
20-Year Saving: £240,000 estate reduction + investment growth
4. Seven-Year Rule Planning
Strategy: Large gifts become IHT-free if you survive 7 years
Taper Relief: Reduces tax between years 3-7
Example: £500,000 gift saves £200,000 IHT if you survive 7 years
5. Trusts for IHT Planning
Types: Discretionary trusts, interest in possession trusts
Benefits: Assets grow outside your estate
Considerations: Trust tax rates, 10-year charges
Best For: Large estates, complex family situations
6. Business & Agricultural Relief
Business Property Relief: 100% relief on qualifying business assets
Agricultural Property Relief: 100% on agricultural land
AIM Shares: 100% relief after 2 years
Potential Saving: Eliminates IHT on qualifying assets entirely
7. Charitable Donations
Rate Reduction: IHT rate reduces from 40% to 36% if 10%+ to charity
Example: £1m taxable estate, £100k to charity
IHT: £324,000 vs £360,000 = £36,000 saving
Plus: Charitable legacy benefit
8. Pension Death Benefits
Benefit: Pensions usually fall outside IHT
Strategy: Draw down other assets first, leave pension for beneficiaries
Age Factor: Tax-free if die before 75, taxed as income if after 75
9. Life Insurance Planning
Strategy: Life insurance in trust falls outside estate
Use: Cover IHT liability, provide liquidity for beneficiaries
Example: £400,000 IHT bill covered by £2,000/year premiums
10. Residence Planning
Non-UK Domiciled: Only UK assets subject to IHT
Changes 2025: New rules for long-term residents
Strategy: Offshore assets, residence planning
🏠 Family Home & Residence Nil-Rate Band
How the Residence Nil-Rate Band Works
✅ Qualifying Requirements
- Property was your main residence at some point
- Left to direct descendants (children, grandchildren)
- Estate value under £2.35m (taper applies above)
- Property included in UK estate
📊 RNRB Calculation Examples
Home Value: £400,000
RNRB Available: £175,000
Home Value: £400,000
RNRB Used: £175,000
Remaining Taxable: £225,000
Home Value: £100,000
RNRB Available: £175,000
Home Value: £100,000
RNRB Used: £100,000
Unused: £75,000 (lost)
Plan Your Estate Tax Efficiently
While we don't have a specific inheritance tax calculator, our investment and pension calculators can help you plan tax-efficient wealth transfer: