You’ve worked hard to build your wealth, now it’s time to make sure more of it reaches the people you care about. With inheritance tax (IHT) affecting more families than ever, understanding how to protect your estate is essential.
Key Takeaways
- IHT applies to the value of your estate on death (or the second death for married couples who leave everything to their spouse initially).
- Changes announced in the 2024 Autumn Budget mean more individuals are likely to face IHT bills.
- Options such as lifetime gifting, setting up trusts, and using life insurance can all help reduce IHT exposure.
- Financial advice plays a key role in protecting your assets and your legacy.
The rising relevance of inheritance tax
Talking about death is uncomfortable, but conversations about inheritance tax are increasingly necessary.
According to The Real Life Advice Report from St. James’s Place, around 60% of people in the UK say they want to leave a financial legacy for loved ones.¹ However, tax rules are shifting. From 2027, unspent pension pots will form part of an estate and could therefore be liable for up to 40% IHT. At the same time, the nil rate band and residence nil rate band are frozen until 2030, drawing more estates into the tax net each year.
This comes as the UK prepares for what’s been dubbed the “great wealth transfer.” Over the next three decades, baby boomers (born between 1946 and 1964) are expected to pass down approximately £7 trillion to younger generations.² Without proper planning, a significant portion of that could be lost to inheritance tax.
The good news? With effective estate planning, you can minimise your IHT liability and pass on more of your wealth to family and loved ones.
Practical steps to reduce your IHT exposure
1. Make use of your annual gifting allowance
Lifetime gifting is one of the simplest ways to reduce the size of your taxable estate. Every tax year, you can give away up to £3,000 free from IHT, known as your annual exemption. Couples can combine allowances to give away £6,000 each year, or up to £12,000 if they carry forward the previous year’s unused allowance.
Gifting not only helps reduce your IHT liability but also allows you to witness loved ones benefiting from your generosity while you’re alive.
2. Gifting larger amounts – and the seven-year rule
You’re free to gift more than £3,000, but it’s important to understand how the seven-year rule works. If you die within seven years of making a gift, that money could still be counted as part of your estate for IHT purposes. However, the potential tax liability reduces over time (known as taper relief).
To protect against this risk, some individuals take out an inter vivos life insurance policy, designed to cover the potential IHT liability if they die within the seven-year window. Before making substantial gifts, it’s wise to consult a financial adviser to ensure your giving plans align with your long-term financial security.
3. Gifting from surplus income
If you have more income than you need for day-to-day living, you can make regular gifts from this surplus that are immediately exempt from IHT. This might include helping grandchildren with university fees, contributing to a deposit for their first home, or covering school costs.
The key rule is that the gifts must come from genuine surplus income, not savings, and must not impact your standard of living. Keeping clear records of your income, outgoings, and gifts will help your executors claim this exemption later.
4. Leave a legacy to charity
Charitable giving can make a real difference while also reducing your IHT bill. Donations to registered charities, whether during your lifetime or through your Will, are exempt from inheritance tax.
If 10% or more of your estate is left to charity, the IHT rate on the remainder of your estate may be reduced from 40% to 36%. You can leave either a specific sum or a percentage of your estate, but it’s important to seek legal advice to ensure your gift qualifies under HMRC rules.
5. Use trusts to ringfence assets
Trusts can be a useful way to protect assets for future generations while maintaining control over how and when they are distributed. Discretionary trusts, in particular, allow trustees to decide how funds are allocated among beneficiaries.
After seven years, assets placed in a trust usually fall outside of your estate for IHT purposes. However, if the amount transferred exceeds your available nil rate band, a 20% IHT charge may apply at the time the trust is created.
Trusts can appear complex, but with expert guidance they can be highly effective, not just for the very wealthy, but for anyone looking to protect family wealth responsibly.
6. Consider a whole of life insurance policy
For those expecting to incur an IHT bill, a whole of life insurance policy (written in trust) can provide funds to cover the tax when the time comes.
According to recent figures, around 2.5 million such policies were in place in 2022. These policies ensure that a lump sum is available immediately on death, without waiting for probate, to settle IHT liabilities or other debts.
It’s crucial that the policy is written in trust, so that the payout itself isn’t counted as part of your taxable estate. Because premiums can rise over time, you should take professional advice to confirm the policy is sustainable for your budget and circumstances.
Why financial advice matters
A recent Real Life Advice Report survey found that nearly one in five adults said financial advice had helped them to leave a better inheritance for their children.³
A qualified adviser can help you build a tailored estate plan that considers your goals, your family’s needs, and the latest tax regulations, helping to ensure your wealth remains within the family for generations to come.
You can also use an IHT calculator to get an idea of the potential inheritance tax liability based on your current estate value.
Ready to start planning?
If you’d like to explore how to protect your estate and reduce your inheritance tax exposure, we can help. Speak to one of our advisers today to start shaping a legacy that lasts.
Taxation rules and reliefs can change and depend on individual circumstances. Will writing and Trust services are not regulated by the Financial Conduct Authority.
Sources:
1The Real Life Advice Report was commissioned by St. James’s Place. Opinium surveyed just under 12,000 UK adults nationwide in two polls between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population. Quantitative data referenced is sourced from the first poll which had a total sample of 7,995 respondents. Survey included those aged 18-34 (1,940), aged 35-54 (2,654) aged 55 and over (3,401).
2Unbiased: the Great Wealth Transfer3Financial Conduct Authority
3What’s the real-life value of financial advice? – St. James’s Place Opinium surveyed just under 12,000 UK adults between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population. Quantitive data referenced is sourced from the first poll which had a total sample of 7,995 respondents.