Inheritance tax planning: a plain-English guide

How inheritance tax works

When you die, inheritance tax (IHT) is charged at 40% on the value of your estate above the available allowances. Your estate includes your home, savings, investments, possessions and any life insurance not written in trust.

The key allowances

• Nil-rate band — £325,000. Everyone can pass on this amount tax-free.
• Residence nil-rate band — up to £175,000. An extra allowance when you leave your home to direct descendants such as children or grandchildren. It tapers away for estates worth more than £2 million.
• Spouse or civil partner exemption. Anything left to a UK-domiciled spouse or civil partner is free of IHT, and unused allowances transfer to them. Between them, a married couple can often pass on up to £1 million tax-free.

Gifting during your lifetime

Giving money away while you're alive is one of the simplest ways to reduce IHT:

• Annual exemption — £3,000 per year (you can carry one unused year forward).
• Small gifts of up to £250 per person per year.
• Wedding gifts — £5,000 to a child, £2,500 to a grandchild, £1,000 to others.
• Gifts from surplus income — regular gifts from income you don't need can be immediately exempt, if properly documented.
• The seven-year rule. Larger gifts become free of IHT if you survive seven years after making them. Die sooner and taper relief can reduce the tax after three years.

Other practical strategies

• Write life insurance in trust so the payout goes straight to your family instead of swelling your taxable estate — and pays out faster, without waiting for probate.
• Use trusts to protect assets, control how they're passed on, and in some cases remove them from your estate. Trusts have their own tax rules, so they need to be set up carefully.
• Leave 10% or more to charity and the IHT rate on the rest of your estate can drop from 40% to 36%.
• Keep your will up to date. A well-structured will makes full use of both partners' allowances — outdated wills often waste them.

Common mistakes to avoid

• Giving away your home but continuing to live in it rent-free (a "gift with reservation" — it stays in your estate).
• Assuming everything passes tax-free between unmarried partners — the spouse exemption does not apply.
• Leaving planning too late for the seven-year clock to run.
• Forgetting that pensions and life policies need their own nominations and trust arrangements.

How we can help

Inheritance tax planning works best as part of your wider estate plan — your will, any trusts and your lasting powers of attorney. We'll look at your whole picture, explain your allowances in plain English, and put a plan in place that fits your family.

This guide is general information, not financial or tax advice. Tax rules and allowances can change, and the right approach depends on your circumstances — please talk to us before acting.