A Legal Guide to Minimising Inheritance Tax

Inheritance Tax (IHT) can significantly impact the amount that you are able to pass to your children or other chosen beneficiaries when you die.

With much-publicised changes made in the last budget, including pensions being brought within the remit of IHT from April 2027 and a reduction in valuable reliefs such as Business Property Relief and Agricultural Property Relief from April 2026, IHT planning is only becoming more important.

For couples with a taxable estate, strategic planning is essential to minimise inheritance tax burden and protect their legacy. Here are planning opportunities that you can discuss with us at Phillips Law:

1. Spouse or Civil Partner Exemption

Transfers between spouses or civil partners are exempt from IHT. This exemption can be used to transfer assets to the survivor, deferring the IHT liability until the second death. Sometimes the act of getting married can be a planning option for unmarried couples concerned about IHT!

2. Nil Rate Band and Residence Nil Rate Band

Everyone has a Nil Rate Band of £325,000, which is the amount that can be passed on tax-free. Additionally, the Residence Nil Rate Band (up to £175,000) may apply if the main residence is left to direct descendants, providing further relief. Ensuring that all available allowances are claimed is essential.

3. Charitable Donations

Gifts to qualifying charities are exempt from IHT. If at least 10% of the net taxable estate is left to charity, the IHT rate on the remaining estate can be reduced from 40% to 36%.

4. Leverage Business and Agricultural Reliefs

If you own a business or agricultural property, you may be eligible for reliefs that reduce the value of these assets for IHT purposes. The rules around these reliefs are complex and will change in April 2026, making professional advice imperative.

5. Deeds of Variation

A deed of variation can be executed within two years of a death to alter the distribution of an estate. This can be used to redirect assets to take advantage of the spouse or charity exemption or to utilise the NRB more effectively.

Similarly, using a Deed of Variation when you inherit from, say, a parent or other family member may help to reduce your own taxable estate.

6. Lifetime Gifts

Gifting assets during your lifetime potentially significantly reduces the value of your estate for IHT purposes. If you survive making the gift by 7 years, it is generally exempt from IHT. However, be mindful of the potential capital gains tax implications of gifting property and shares.

It is vital that all gifts are given away completely and that no benefit is retained by the person making the gift. Otherwise, there is the potential for gifts to be classed as ‘gifts with reservation of benefit,’ which is disastrous.

Establishing a Lifetime Trust

It can be advisable to gift to a trust instead of an individual. By using a trust, you can retain control over the gifted sums, and they do not need to be given to a particular person straight away. For example, a discretionary trust can provide flexibility and control over how assets are distributed.

In the same way as other gifts, transfers to a trust must be survived by seven years, or there will be an impact on your available nil rate band on death. Professional advice is vital, as there is the potential for lifetime IHT to be paid if gifts exceed your available nil rate band.

7. Write Life Insurance Policies in Trust

By writing life insurance policies in trust, the payout will not usually form part of your estate and will not be subject to IHT. This ensures that the proceeds can be used to cover any IHT liability without increasing the estate’s value.

8. Regularly Review and Update Your Will

It is important to ensure that your will is up-to-date and reflects your current wishes, taking into account any changes in your financial situation or family circumstances. This is crucial for effective estate planning and minimising IHT.

Professional Advice

Given the complexities of IHT planning, it is always advisable to seek professional legal advice, coupled with financial advice. This ensures that your estate is structured in the most tax-efficient manner and complies with all legal requirements.

By implementing these strategies, couples can effectively manage their IHT liability, ensuring that more of their estate is preserved for future generations.

For expert guidance on inheritance, get in touch with the dedicated Wills, Trusts and Probate team at Phillips Law.

Email: [email protected]
Phone: 01256 460830