Inheritance Tax: What You Need to Know
Inheritance tax (IHT) can be a significant financial burden, but with the right financial advice, you can reduce or even eliminate the amount your loved ones will have to pay. At Universal Finance, we provide expert advice to help individuals and families navigate inheritance tax planning efficiently. In this guide, we’ll explain how IHT works in the UK and outline key strategies to help you plan effectively.
With the 2024 Budget bringing changes to family farms and pensions, many are wondering how inheritance tax will be affected. Farmers may face new challenges in passing down land, while pension changes could impact estate planning. But what exactly is inheritance tax, and who does it apply to?
What is inheritance tax?
Inheritance tax is a tax on the estate (property, money, and possessions - and now pensions) of someone who has passed away. In the UK, the current inheritance tax rate is 40%, applied to the portion of the estate that exceeds the £325,000 threshold (known as the nil-rate band).
Who needs to pay inheritance tax?
If the total value of the estate is below £325,000, no inheritance tax is due.
If you leave your home to your children or grandchildren, the threshold can increase to £500,000 thanks to the residence nil-rate band.
If your estate exceeds these thresholds, 40% tax is charged on the amount above them.
Example calculation:
If your total estate is worth £600,000 and your nil-rate band is £325,000, the taxable amount is £275,000. At 40%, the inheritance tax due would be £110,000.
How to reduce your inheritance tax liability
1. Leave everything to your spouse or civil partner
Transfers between spouses or civil partners are exempt from IHT. Any unused allowance can also be transferred to your spouse/civil partner, effectively doubling their threshold to £650,000 (or £1 million with the residence nil-rate band).
2. Make use of gifts & allowances
You can give away money or assets during your lifetime to reduce the size of your taxable estate. Key gifting rules include:
Potentially exempt transfers (PETs) – Gifts made more than seven years before death are usually free from IHT. Gifts made from regular income are also exempt from IHT.
Annual gift allowance – You can give away £3,000 per tax year without it counting towards your estate.
Small gifts exemption – You can give up to £250 per person per year without incurring IHT.
Wedding gifts – Parents can gift £5,000, grandparents £2,500, and others £1,000 tax-free.
Key gifting includes:
Potentially exempt transfers (PETs)
Gifting from regular income
Annual gift allowance
Small gifts exemption
Wedding gifts
3. Set up a trust
Transferring assets into a trust can be an effective way to reduce your inheritance tax liability. Once placed in a trust, the assets are managed by a trustee or group of trustees on behalf of the beneficiaries. These assets are no longer part of your estate, meaning they’re excluded from IHT calculations — provided you live for at least seven years after transferring them. Be sure to understand the implications of the seven-year rule and consult with a specialist before making any decisions about setting up a trust.
4. Donate to charity
Donating to charity is a powerful way to reduce your inheritance tax (IHT) liability. If you leave at least 10% of your net estate to a registered charity, the IHT rate on the remainder of your estate drops from 40% to 36%. In addition, charitable donations are completely tax-free, allowing you to support causes close to your heart while also benefiting from valuable tax savings. It's a win-win for both your legacy and the charities you care about.
5. Consider life insurance
While life insurance won’t reduce the tax itself, taking out a life insurance policy in trust can provide a lump sum to cover any IHT liability, ensuring your loved ones aren’t left with a hefty bill. We would typically use a whole of life insurance policy for this purpose, although your current health will play a significant role as to whether we can get you cover or not.
6. Use business & agricultural reliefs
Business and agricultural reliefs (BPR and APR) help reduce IHT on family businesses and agricultural assets. BPR can provide up to 100% relief on unquoted business shares or partnerships, while APR offers up to 100% relief on agricultural land and property. However, from April 2026, the first £1 million of combined business and agricultural assets will remain IHT-exempt, with a 50% relief applying to assets above this threshold. These changes may increase IHT liabilities for larger estates, so it's crucial to plan ahead and understand the new rules to protect wealth for future generations.
Get financial advice tailored to you
Inheritance tax planning isn’t just for the wealthy - it’s for anyone who wants to ensure their loved ones benefit as much as possible from their estate. With careful planning and the right financial advisor, you can legally reduce your tax bill and leave more for your family.
“At Universal Finance, our team of experienced financial advisors provides personalised estate planning strategies to help you protect your wealth. ”
📩 Need inheritance tax advice? Contact Universal Finance today for expert advice tailored to your situation.
*The information in this blog post is for general guidance only and should not be considered financial or tax advice. Tax laws are subject to change, and individual circumstances vary. Always seek professional advice tailored to your specific situation.
