Inheritance Tax Planning - key considerations to help reduce inheritance tax

In the Autumn Budget 2025, Chancellor Rachel Reeves announced that the inheritance tax threshold will remain frozen until April 2031, despite property and other asset prices continuing to rise. This means more people are likely to fall above the current threshold and may become liable for inheritance tax, unless appropriate estate planning is put in place.

So, how can you reduce the risk of inheritance tax being payable on your estate?

What is the inheritance tax threshold?

The inheritance tax threshold refers to the value of your estate upon your death. Although the calculation can be complex, your estate generally consists of everything you own, including cash savings, property, businesses, investments, possessions, vehicles, and insurance policies, less any outstanding debts or liabilities.

Anything above the inheritance tax threshold may be taxed at 40%. Currently, the main threshold (known as the nil-rate band) allows your beneficiaries to inherit up to £325,000 without inheritance tax being charged.

There is also an additional allowance called the residence nil-rate band. This applies if you leave your home to a direct descendant. It currently stands at £175,000 and applies when passing your main residence to children, grandchildren, step-children, adopted children or foster children.

What should I consider when reviewing my inheritance tax plans?

Combine your allowances with your spouse

Married couples can combine their nil-rate bands and residence nil-rate bands on death. This means that an estate may pass up to £1 million without inheritance tax being due.

Making gifts to reduce the size of your estate

Gifting money, property or savings during your lifetime can reduce the value of your estate and may bring it below the inheritance tax threshold.

However, if you make a gift and pass away within seven years, inheritance tax may still be payable by the recipient. This depends on the type and value of the gift, as different rules apply to different types of gifting.

There are also some exemptions, including:

• Annual gifts of £3,000 per year
• Small gifts up to £250 per year
• Wedding gifts up to £5,000
• Other gifts made from surplus income

As with all inheritance tax planning, conditions must be met for these exemptions to apply and to help reduce any tax liability.

There are several options when placing assets into a Trust, including Life Interest Trusts and discretionary Trusts. A Trust allows you to place assets outside of your estate while still retaining a level of control. You can decide how the assets are managed, who benefits from them and when.

Pension planning and inheritance tax

Pensions were previously exempt from inheritance tax, as they were not included in your estate and could therefore be passed on to a beneficiary.

However, from April 2027, the government will bring unspent pension pots into the scope of inheritance tax, removing the opportunity to use pensions as a tax planning vehicle in this way.

Leaving money to charity

Certain charitable gifts left in your Will may be exempt from inheritance tax.

In addition, if you leave at least 10% of the value of your estate above the nil-rate bands to charity, the inheritance tax rate on the remainder of your estate may be reduced from 40% to 36%

Summary

It is never too early to start planning for the future. While some of these points may seem straightforward, in reality, there are many rules, restrictions and conditions to consider. We regularly support families who come to us after the loss of a loved one and are faced with significant tax bills that could potentially have been reduced with earlier planning.

Good estate planning is not only about protecting your beneficiaries in the future, but also about ensuring you have enough to live on during your lifetime. Making the right decisions can be complex, particularly if you have a larger estate, which is why it is always sensible to seek legal advice from experienced estate planners.

Get in touch

To discuss your inheritance tax plans, contact our friendly Private Client team today. You can call 01329 288 121 or email enquiries@warnergoodman.co.uk.