This article explains the basics of inheritance tax and outlines how you might mitigate its impact on your wealth and succession planning, including by:
The right strategy or, more likely, combination of strategies, will depend on your views, family dynamics, and your broader financial planning strategy.
Contact us to discuss how we can optimise your financial planning strategy, to manage your estate’s potential inheritance tax liability.
Your estate
Your estate is the assets that you own (such as property, possessions, investments, and cash), less your liabilities, when you die.
If you are a UK long-term resident [i] [ii], inheritance tax applies to your worldwide estate when you die. It may also apply to gifts made in the seven years before you die.
The rate of inheritance tax
UK inheritance tax is levied at up to 40% on death, though several exemptions may be available, including:
Spending removes cash from your estate immediately, so increasing your expenditure is an effective way to reduce inheritance tax exposure. However, setting expenditure requires careful appraisal of your ability to fund your lifestyle for the rest of your life.
Cashflow and asset value forecasting can help you to understand:
When planning expenditure and gifting, longevity and investment returns are great uncertainties, and you are unlikely to want to deplete your assets below a certain level, so other inheritance tax mitigation strategies may be useful, even if maximising expenditure is your primary goal.
Another means of reducing the value of your estate and therefore its inheritance tax liability is through lifetime gifts [iv]. There are three main categories of gifts, as summarised below.
Immediately exempt transfers
These are immediately outside of your estate for the purpose of inheritance tax and include:
Potentially exempt transfers
Lump sum gifts to individual beneficiaries are likely to be potentially exempt transfers to the extent they exceed your annual exemptions. Potentially exempt transfers may be of unlimited value and become exempt if you survive for a period of seven years after the gift.
Therefore, paying a potentially exempt transfer earlier starts the seven-year clock sooner. You could consider gifting larger lump sums, or pay smaller regular gifts, such as helping the recipient to fund contributions to ISAs.
Chargeable lifetime transfers
Gifts to discretionary trusts are considered chargeable lifetime transfers. If your total chargeable lifetime transfers in the past seven years exceeds your nil rate band (£325,000), the excess is subject to inheritance tax at the lifetime rate of 20%.
Trusts can be useful planning tools where you do not want transfer control or access of assets to beneficiaries. However, they can be complex, so you should seek advice.
Business relief solutions
Several asset management companies offer investment solutions aligned with business relief rules.
Business Relief may[vii] apply to interests in unlisted businesses after a holding period of two years. Currently, 100% of the inheritance tax liability is relieved. From 6 April 2026 [ii]:
Investments in Enterprise Investment Schemes (EIS) may be eligible for Business Relief and may also be eligible for other tax reliefs, including a 30% income tax reduction.
Business relief, AIM, and EIS solutions may be attractive for you if you want to reduce your exposure to inheritance tax and retain access to assets. However, they may be high-risk, complex, and / or have limited liquidity; you should receive expert advice to ensure allocations to these assets are appropriate in the context of your financial planning strategy.
Defined contribution pensions
Currently, pensions are usually excluded from an individual's estate for inheritance tax purposes. However, from 6 April 2027, most unused pension funds and death benefits will be included within the value of an individual’s estate for Inheritance Tax purposes ( payments to spouses will remain exempt)[ii].
If you have been deferring withdrawing an income from your pension on the basis the pension value would not be subject to inheritance tax, you should review your strategy.
You could establish life insurance to provide a lump sum on death to provide liquidity for your beneficiaries to pay your estate’s potential liability to inheritance tax.
Whole of life insurance
You pay regular premiums for the rest of your life in exchange for a lump sum payable on death. You can fix the premiums by choosing to implement the policy on a guaranteed basis, providing a ‘return’ for the beneficiaries. The exact return depends on how long you live, though it is unlikely the premiums would exceed the lump sum death benefit.
Term life insurance
Provides a lump sum on death within a specified term. You could establish a term life policy to protect your estate’s potential inheritance tax liability while you implement a longer-term inheritance tax mitigation strategy, for example, to allow any potentially exempt transfers to become exempt.
The premiums for a term life policy are lower than for a guaranteed whole-of-life policy. However, your cover ceases at the end of the term and the premiums for a new policy (for example, if you had not implemented your strategy) are likely to increase substantially (if you can obtain a new policy).
Trusts
You should consider establishing your life insurance policy in a trust, so the proceeds do not form part of your estate. You should receive advice to ensure the policy, and trust, meet your requirements and are tax efficient.
Emigrating is unlikely to be a step that you would consider solely to reduce inheritance tax but if moving suits your lifestyle it could be extremely efficient.
If you have been resident in the UK for the past ten tax years, then from 6 April 2025 [ii], it is likely to take ten years of non-residence before your non-UK assets are not subject to UK inheritance tax.
You should consider your tax position in your new home country as well as in the UK.
Notes:
[i] The 30 October 2024 budget announced that, from 6 April 2025, the UK’s inheritance tax rules will change so that individuals will be exposed to inheritance tax on their worldwide assets once they have been UK tax resident for 10 or more of the previous 20 tax years (referred to as “Long-term Residents”). At present, an individual's inheritance tax exposure is dictated by whether you are domiciled (or deemed domiciled) in the UK - broadly, domicile is the country that is (or is deemed to be) your permanent home or homeland. For ease of reading, we have used the term 'long-term resident' in this article. Individuals that are not long-term resident will only be subject to UK inheritance tax on UK assets.
[ii] These rules were announced in the 30 October 2024 budget and may change before becoming law.
[iii] If a gift (on lifetime or death) is made from a long-term resident to their spouse that is not, then the spouse exemption will be capped unless the recipient elects to be treated as a long-term resident.
[iv] If you continue to benefit from the gifted asset(s), it could be considered a gift with reservation of benefit, and the asset(s) may be considered to remain in your estate for inheritance tax purposes.
[v] You can bring forward any unused allowance from the previous year.
[vi] £5,000 to a child, £2,500 to a grandchild and £1,000 to any other person.
[vii] To qualify for relief, the businesses must be run to make a profit, and must not focus on investments, land, or buildings.
General:
This article is meant as a summary only and we have simplified many of the areas for brevity and readability.
Any reference to legislation and tax is based on our understanding of UK law, and HMRCs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered.
Before you invest in any type of investment or account, you should receive personalised advice from an independent financial adviser. You risk losing capital when you invest.
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