IHT receipts for April to May 2025 were £98 million higher than for the same period last year. The Office for Budget Responsibility’s latest forecast, published at the Spring Statement, predicts that IHT will raise £9.1bn in the 2025 to 2026 tax year.
What this shows is that many families who haven’t done any planning may have paid tax they didn’t need to.
What can I do to plan for IHT?
Before considering any steps to mitigate IHT, it is important to consider some fundamental questions, such as:
- What should any surviving spouse or civil partner inherit? Often, the simple answer is ‘everything.’ This leaves many decisions about wealth distribution to other potential beneficiaries until the second death.
- Who do you want the money to go to? Are there specific items that you want to leave to particular individuals? These can range from jewellery to shares in a family business
- What framework, if any, do you need for passing down money? For example, you may be happy to leave money outright to a 40-year-old architect daughter. The same may not be true of a 19-year-old student son.
Answers to these questions will shape your will and provide a structure for any IHT planning. It can also start the conversation about whether making some lifetime gifts is a good idea.
Certain gifts made during your lifetime will be altogether exempt from IHT. They will fall out of your estate for IHT purposes as soon as you make them. These include:
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Annual exemption: gifts of up to a total of £3,000 each tax year. You can use the previous year’s exemption if you did not use it then.
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Small gifts exemption: gifts of up to £250 to as many people as desired. However, the exemption does not apply to gifts to anyone who in the same tax year has received a gift covered by the £3,000 annual exemption.
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Gifts out of surplus income exemption. Regular gifts out of surplus income that do not reduce your standard of living. The critical thing here is that this only applies to income, not withdrawals from savings accounts or investments, for example.
Other lifetime gifts, particularly if made outright, will in most instances attract no IHT when they are made. You will avoid IHT altogether if you survive for the following seven years.
Transfers during lifetime or on death between spouses/registered civil partners are generally exempt without limit. The rules allow each person to leave up to £325,000 (taking account of any such transfers made in the immediately preceding seven years) to anyone other than their spouse/civil partner free of IHT.
A surviving spouse/civil partner can “inherit” any of the £325,000 “nil rate band” not used on death, and potentially double their nil rate band. The same is true (but with important limitations on who can inherit, and how, within this allowance) of the residence nil rate band of £175,000.
What about Trusts?
Trusts can provide a way of controlling access to gifted money. They do so by putting a third party in control of the money. These are the trustees who deal with the gift following the terms of the trust that the person who makes it creates. The trust can be as rigid or as flexible as you want it to be and can offer a range of tax and non-tax benefits.
What might happen in the future?
Pensions are due to become part of people’s estates in April 2027. In addition, by 2026, Business Relief will be limited. With a Government need to raise taxes to pursue its spending goals, IHT could be reviewed again to find ways to generate extra revenue.
An IHT/estate planning review could be worthwhile to ascertain what, if any, planning and provision may be possible.
If you need advice, we’re here to help. Schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
