Inheritance Tax (IHT) reduces the amount you’re able to leave behind for family and friends. If your estate is worth more than £2million, you could face an even larger IHT bill than you might anticipate. Here’s why you should be factoring IHT into your estate planning, and what you can do about it.
Frozen Thresholds Are Increasing the Number of Estates Liable for IHT
The thresholds at which estates become liable for IHT have been frozen until 2030. This means that as the value of properties and other assets rise, more estates will fall into the IHT net.
HMRC (Link to HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin)- GOV.UK) statistics show a year-on-year rise in IHT receipts. From April to December 2024 alone, IHT generated £6.3 billion—£0.6 billion more than the same period in 2023.
At a standard 40% IHT rate, an estate subject to this tax could see a significant reduction in the value passed on to beneficiaries. For estates worth more than £2 million, this liability can be magnified due to tapering rules.
The Residence Nil-Rate Band Taper Could Take You By Surprise
When planning for IHT, most people account for two tax-free thresholds:
Together, when planning as a couple, this allows you to pass down up to £1 million before IHT is applied.
However, estates worth more than £2 million are subject to a tapering of the residence nil-rate band. For every £2 above the £2 million threshold, the residence nil-rate band is reduced by £1.
This means that if your estate exceeds £2.35 million, the residence nil-rate band is wiped out entirely unless transferred. For couples, this figure extends to £2.7 million with a second transferable nil-rate band on death.
If you’re unaware of this taper, your loved ones could face a far higher tax bill than you expect.
Actionable Steps to Reduce a Potential IHT Bill
There are proactive measures that can be implemented to mitigate your estate's liability for inheritance tax. By integrating the following strategies into your estate planning, it is possible to enhance the amount passed on to your beneficiaries.
1. Write or Update Your Will
A will is essential for ensuring your estate is distributed according to your wishes. It can also help you maximise IHT allowances efficiently. For instance, by leaving certain assets to your spouse or civil partner, you can take advantage of their tax-free allowance.
Consider seeking professional legal advice to ensure your will is comprehensive, legally sound, and reflective of your current wishes. Regularly reviewing and updating your will is equally important, particularly after significant life events.
2. Use Trusts to Manage Assets
Placing some of your assets in a trust can remove them from your estate for IHT purposes. You name trustees to manage the assets and beneficiaries to receive them.
However, trusts can be complex and are often subject to the seven-year rule. Consulting a financial adviser, along with a tax consultant /solicitor will help you set up a trust that aligns with your goals while minimising unnecessary risks.
3. Consider Transferring Assets During Your Lifetime
Reducing the value of your estate through lifetime gifts can have a dual benefit, you can provide loved ones with financial support when they need it most and reduce your IHT liability. Gifts given more than seven years before your death are not subject to inheritance tax (unless they form part of a trust), which can be a helpful strategy for effective estate planning.
Full information about tax-free gifting can be found on Gov.uk
4. Gift to Charity
Leaving at least 10% of your estate to charity can reduce your taxable estate’s IHT rate from 40% to 36%. This strategy, while supporting a charitable cause, could also mean your loved ones receive more than they otherwise would.
5. Consider getting life insurance to protect your loved ones!
While life insurance doesn’t reduce your taxable estate, it can provide a way for your loved ones to pay the IHT bill. Whole of life insurance policies ensure a pay out upon your passing.
To avoid the pay out forming part of your taxable estate, make sure the policy is written in a trust.
Why Is Professional Advice Crucial?
Inheritance Tax rules can be highly complex, especially for high-net-worth individuals with larger estates or diverse assets. The tapering effects, frozen thresholds, and rules surrounding gifts or trusts mean that even small oversights could significantly impact your IHT liability.
Financial advisers help you develop estate strategies that balance your desire to pass wealth efficiently with your current lifestyle needs. Similarly, solicitors ensure that legal frameworks like wills and trusts adhere to your long-term goals.
Get in Touch for Tailored IHT Advice
No one likes surprises when it comes to taxes, and planning ahead can give you confidence that your estate will be handled as you wish. If your estate is worth more than £2 million, understanding the full potential impact of IHT is essential.
Contact us to discuss your estate planning options and learn how you could take steps to reduce your IHT liability. We’re here to help you find clarity, take control, and maximise what you pass on to your loved ones.
Please note that the Financial Conduct Authority do not regulate estate or tax planning.
.jpg)
.svg)
.svg){kind=small}