A report from Schroders has revealed that 71% of UK adults don’t understand how Inheritance Tax (IHT) works, or what their beneficiaries might have to pay.
This is understandable, as it can be a complex and difficult area. But this lack of awareness could lead to problems further down the line, with loved ones left to handle the financial implications of their inheritance.
The survey also noted that just 27% of respondents consulted a financial adviser to make a plan. Yet, when asked about the common financial planning mistakes families make, the top response, cited by 46%, was failing to plan for retirement and later-life care.
So, a significant number of people realise the importance of education and planning but put it off as something for another day.
Grasping the fundamentals of Inheritance Tax could help with your estate planning
According to MoneyMarketing, the number of estates in the UK subject to IHT could exceed 37,000 by the end of 2026/27, resulting in a combined annual bill of almost £9 billion.
IHT is applied to your estate when you die, at a standard rate of 40%, if it exceeds certain limits. The threshold for paying (the “nil-rate band”) is £325,000 in the 2025/26 tax year.
There is also the residence nil-rate tax band, which is £175,000 in 2025/26. It applies if you leave your main residence to direct descendants (such as children or grandchildren).
Effectively, these two nil-rate bands mean you could leave a £500,000 estate with no IHT to pay.
Once your estate passes £2 million, however, this residence nil-rate band is tapered: for every £2 your estate goes beyond this threshold, the allowance is reduced by £1.
These thresholds have remained the same for some time and were frozen until 2026 under the last government. The Chancellor has now announced this is being extended until 2030, meaning more estates could find there’s IHT to pay. MoneyWeek has stated that April 2025 saw a £97 million increase in IHT compared with the previous year.
Changes due to take effect from April 2027 will also see inherited pensions added to an estate for IHT calculation purposes.
If you’re married or in a civil partnership, you can leave your entire estate to your spouse, and they won’t need to pay IHT on it. But if you’re co-habiting – regardless of for how long – your partner won’t have any automatic rights to your estate. Even if you leave it to them in your will, it will still be liable for IHT once it passes the threshold.
There are some ways you could mitigate the amount of IHT your estate will pay:
Gifting
You can gift assets during your lifetime to lower the value of your estate. This could keep your total assets below the IHT threshold or at least reduce your overall liability.
Some gifts are IHT-free from the moment you make them. This is thanks to HMRC exemptions, which include:
- Gifts up to £3,000, either to one person or split between several people
- Small gifts up to £250, as long as the beneficiary hasn’t received any other gift from you
- Wedding gifts up to £5,000 for your children, £2,500 for your grandchildren or great-grandchildren, or £1,000 for other recipients.
You can give gifts beyond these exemptions, known as “potentially exempt transfers” (PETs), but these could still be included in your estate for IHT purposes for up to seven years.
Set out your wishes in your will
Another way to manage your IHT liability is to distribute your assets effectively. For example, making sure your main property is left to children or grandchildren means you can take advantage of the residence nil-rate band to boost your threshold by £175,000.
It’s always a good idea to regularly review your will. Speak to us to make sure you’re taking every opportunity to manage your IHT liability.
Placing your assets in a trust
Most assets placed in a trust won’t be included in IHT considerations. Essentially, a trust is a legal arrangement, holding assets on behalf of another person.
There are several different types of trust, and they can be complicated. It’s always a good idea to speak to a professional about the pros and cons of this option.
Although it may feel strange to discuss these matters with your family, open conversations about what will happen after you die will help them to manage their inheritance.
And, according to Schroders, 50% of those who talk with their children about finances say it builds trust and 47% believe it fosters an understanding of the importance of saving and investing.
Get in touch
If you’d like to talk to us about any aspect of financial and estate planning, please get in touch by emailing enquiries@gag-ltd.com or calling 0131 363 0090.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.