You’ve worked hard your whole life to build up your wealth, and you deserve to keep as much of that wealth as you possibly can.
Estate tax planning is a lot more than money.
It’s about making sure your family and loved ones, whoever they may be, are looked after. It’s about passing on everything you’ve worked hard to build in the most tax-efficient way possible.
However you’ve built your wealth, whether it be by owning property, investing or having your own family business, it’s crucial to plan ahead as much as you can in order to leave the legacy you’ve worked so hard for.
Understanding Estate and Inheritance Taxes
In the UK, inheritance tax (IHT) is simply what your estate may be charged when you pass away. It’s often seen as a tax on the wealthy, but with property prices rising and thresholds frozen, more families are being caught in the net.
This is how it works:
- The standard threshold (known as the nil-rate band) is £325,000. Anything above that could get taxed at 40%.
- If you pass on your main residence to a direct descendant, you may benefit from an additional residence nil-rate band of £175,000.
- Civil partnerships and marriages allow couples to combine allowances, meaning they potentially pass on as much as £1 million tax-free.
- Anything left to a spouse, civil partner, or charity is usually exempt.
Knowing the rules is the first step. Then comes knowing how to make them work in your favour. This is the point where carefully thought-out estate planning takes centre stage.
Ways You Can Minimise Tax on Estate
Let’s look at the fully legal ways you can lower the size of your taxable estate. Remember, the fundamental key is to act and review early and regularly.
1. Make Lifetime Gifts
You can give away up to £3,000 each tax year – this is known as your annual exemption, and it resets every April. On top of this, you can give up to £250 to any number of individuals, as long as they haven’t already received part of your £3,000.
You can also give wedding gifts – up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else – and make regular gifts out of surplus income, like funding a grandchild’s school fees. These are immediately exempt from inheritance tax, as long as you can show they’re truly affordable and made from income rather than capital.
Larger gifts, known as potentially exempt transfers, may become tax-free if you survive seven years after giving them. But some gifts, such as those into certain types of trusts (called chargeable lifetime transfers), may face tax at the time of the gift. Keeping clear records is essential, as they can affect what’s included in your estate later.
2. Use Your Trusts Wisely
Trusts can help set aside assets for future generations, for example, to support grandchildren or protect inheritance from divorce. But they’re not tax-free vehicles. Most discretionary trusts fall under what’s called the “relevant property” regime, which can trigger a 20% tax charge on assets over the inheritance tax threshold when the trust is set up. Further charges can also apply every ten years or when assets are taken out.
Trusts still have a role in estate planning, but it’s essential to get advice on the right type and structure for your needs.
3. Pension Planning
Right now, pensions sit outside your estate for inheritance tax purposes. This means you can often pass on unused pension pots to your loved ones, tax-free, particularly if you die before age 75.
From April 2027, this will actually change. Death benefits and unused pension funds could get included in your estate for inheritance tax purposes under these new government proposals.
The details are still being finalised, so if you’re relying on your pension as part of your legacy, it’s a good idea to review your plans and keep an eye on the changes.
4. Charitable Giving
If you leave at least 10% of your total net estate to a charitable organisation, this can reduce the IHT on the rest of your estate from 40% to 36%.
It’s a generous move that can also lead to a tax-saving outcome.
Each of these tools can help reduce your estate’s tax bill – but timing, documentation, and expert advice are key.
Planning for Generational Wealth Transfer
Good estate tax planning isn’t just about minimising tax, it’s about making sure your wishes are carried out clearly and efficiently.
Start with the basics:
- Write or review your will: it’s the foundation of any good estate plan.
- Name your beneficiaries: for your pensions, life insurance, and any accounts that allow it.
- Discuss your intentions: family conversations around inheritance can prevent misunderstandings and allow you to share the “why” behind your decisions.
Own a business? You need to be thinking ahead about succession. We know it can be a tricky conversation to have with family, but if you go into it with fairness and clarity after some careful planning, it can seem way less daunting. It’s one of the most meaningful ways you can pass on your wealth.
How IFP Can Help
At IFP, we make tax planning feel empowering. We strip away the overwhelm and guide you through it all with respect and care. Our fabulous advisers help our clients to fully understand their options, stay clear of common mistakes and structure plans which reflect their personal values, as well as the number in their bank.
We are independent and chartered, meaning our advice is 100% in your best interests.
Estate tax planning is a totally unique experience for each individual, so having a firm that takes the time to create bespoke plans and truly understand you and your family is key.
Take the First Step
If you’ve not reviewed your estate plan in a while, or if you’re unsure where to begin, this could be your sign to reach out and get the ball rolling.
Just contact our team for a friendly, pressure chat or explore our Inheritance Tax Planning resources.
These things deserve a lot more than getting caught up in a guessing game.
