Inheritance tax (IHT) planning advice guide

You can’t live forever – but you can help your loved ones inherit as much of your wealth as possible.

If your total assets are over the inheritance tax (IHT) threshold, your family may have to pay a bill soon after your death.

But with advance inheritance tax planning and advice, you can keep that bill to a minimum.

What is inheritance tax?

Inheritance tax is the tax your beneficiaries may have to pay if your estate (that is, everything you own) is above a certain size.

You can leave up to £325,000 to your beneficiaries tax-free – this is known as the IHT nil-rate band.

Everything about that threshold will be taxed, usually at a rate of 40%. For large estates, this can result in a substantial bill.

You can pass wealth to your spouse or civil partner with no IHT to pay, although there is no exemption for unmarried partners.

What assets are included?

Property, investments, money and possessions are included in your estate for IHT.

Currently, pension wealth is excluded from IHT, but this is due to change in April 2027. This means any unused money in your pension pot will be added to the value of your other assets when working out your IHT bill.

Businesses and farms have different rules for IHT, which are also due to change in April 2026.

Who pays inheritance tax?

If you have a will, the named executor will arrange the tax payment to HMRC.

If you don’t have a will, the administrator of your estate will do this instead.

The tax payment is usually made from funds within the estate or money raised by selling assets.

After the inheritance tax has been paid, the remaining value of the estate is distributed.

A common challenge is that HMRC requires IHT to be paid within six months, but probate (the process of releasing assets from an estate) often takes longer than that.

Also, probate isn’t usually granted until IHT has been paid, which can seem like a catch-22.

However, there are many possible solutions.

For example, if there's enough cash in the estate to settle the IHT bill, the executor can arrange a payment directly from the estate to HMRC.

Another option, if some of the estate is in the form of property, is to pay off the tax on the property in instalments over as long as 10 years.

However, if there isn't enough cash in the estate, the executor can secure a loan from a bank to pay the IHT bill and repay the sum when probate is granted.

The last solution is if some of the estate is in the form of property, IHT on the property can be paid off in instalments over as long as 10 years.

There are various other circumstances in which it may be challenging to settle the IHT bill upfront.

Talk to a financial adviser if you are the executor of an estate and find yourself in this situation.

Is the family home exempt from inheritance tax?

There’s an extra IHT allowance called the residence nil rate band.

Set at £175,000, this tops up your £325,000 allowance if you pass a ‘primary residence’ (i.e. your main or only home) on to your direct descendants, such as children or grandchildren.

You can also pass on wealth to your spouse or civil partner, free from IHT. Any unused nil rate band or residence nil rate band can be passed to your spouse for their estate to use on their death.

This means a married couple can effectively pass on up to £1 million free from inheritance tax due to the doubling up of allowances.

It’s possible to lose your residence nil rate band if your estate is worth more than £2 million. The allowance is reduced by £1 for every £2 the value exceeds £2 million, and estates worth over £2.35 million have no residence nil rate band available.

How do I go about inheritance tax planning?

If you leave your entire estate to your spouse or civil partner, they won’t have to pay inheritance tax.

There are also exempt beneficiaries, such as charities, who won’t be taxed on anything you leave to them.

If your estate is left to others, your loved ones could end up with an IHT bill to pay.

There are various ways you can reduce the size of your taxable estate during your lifetime, such as by making gifts, setting up trusts, charitable giving and other forms of planning.

Getting tax advice when you make a will could help you use all your allowances and, therefore, reduce your tax bill.

For example, it is possible to lose some of your residence nil rate band if you don’t leave your house to a direct descendent.

Using gifts

Any gift you give seven or more years before your death is exempt from IHT. However, you must be able to demonstrate they are outright gifts.

If you continue receiving rent from a second property, for instance, it would be called a ‘gift with reservation of benefit’ and could still be included as part of your estate, even after seven years.

The same would apply if you ‘gave away’ your home but continued to live in it rent-free.

Any gift made within seven years of death is counted as part of your estate for IHT purposes.

With smaller gifts, you don’t have to worry about the seven-year rule. You can make up to £3,000 worth of gifts in any tax year, free of IHT.

This allowance carries over to the following year, so if you haven’t used the past year’s allowance, then a married couple could give away up to £12,000.

Other exemptions apply to wedding gifts – parents can give £5,000, grandparents £2,500, and anyone else can gift up to £1,000.

Lastly, any gifts worth £250 or under made to individuals are exempt, as long as you haven't used another allowance on the same person. 

By planning with the help of an adviser, you can use these allowances to steadily reduce the size of your estate and reduce the taxable amount.

Using trusts

Making gifts to a trust is similar to making gifts to an individual. There could be tax to pay if you die within seven years of making the gift.

A trust allows you to set money aside to support a beneficiary in a certain way or at a specific time (such as to pay university fees).

Trusts can be placed outside your estate, meaning they can be free of inheritance tax.

You can also set up a life insurance policy to cover an IHT bill.

If the policy pays into a trust outside your estate, the payout will not be taxed and can be used to pay HMRC.

Trusts are a specialist area, so be sure to consult a financial adviser first and a solicitor when setting them up.

Find out more about trusts and estate planning.

Does a will avoid inheritance tax?

The most important step in inheritance planning is making your will and keeping it up to date.

Making a will with a specialist solicitor could reduce your tax bill by making use of available exemptions, although you could still have IHT to pay.

You also need to appoint a dependable executor, as this is the person responsible for ensuring the IHT bill is paid out of your estate. A solicitor can help you make your will.

Get expert financial advice

Planning for inheritance tax can significantly impact how much of your estate is preserved for your loved ones.

By understanding the various strategies available, such as gifts, trusts, and using allowances, you can minimise the tax burden on your estate.

Proactive and informed planning will ensure that your wealth is distributed according to your wishes, with the least possible financial strain on your heirs.

Let Unbiased match you with a financial adviser for expert financial advice on effective inheritance tax planning and optimising your estate for your loved ones.

If you found this article helpful, you might also find our articles on business property relief and how to protect your property portfolio from IHT informative too.