Jul 31•Written By Heaton Vences

Your Guide To UK Inheritance Tax Planning

Inheritance Tax (IHT) is the tax paid on your estate, be it property, money or possessions, when you pass, reducing the value that will go to your beneficiaries. In this guide we cover the UK tax laws you need to be aware of, as well as the various relief options available, to ensure your beneficiaries retain as much of your wealth as possible.

UK Inheritance Tax Laws

Understanding the Basics 

As it stands in the tax year 2024/25, there is no inheritance tax to pay if the estate is below the £325,000 threshold or if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community sports club. However, if you give your home away to your children, which includes adopted, foster and stepchildren, or grandchildren, your threshold can increase to £500,000. It’s worth noting that if you’re married or in a civil partnership and your estate is below the threshold, the unused amount can be added to your partner’s threshold when you die. 

The standard inheritance tax rate in the UK is 40%. So for example, if your estate is worth £700,000 and your tax-free threshold is £325,000, IHT will be charged at 40% on the remaining £375,000. However, a reduced rate of 36% can be applied to certain assets if you leave 10% or more of the net value of the estate, minus any debts, to charity in your will.  

Taxes On Gift Giving 

It’s important to be aware that some gifts you give while you’re alive can be taxed after your death. Although, taper relief may be applied depending on when you gave the gift; meaning if you die between three and seven years after gifting, the tax will be reduced on a sliding scale. Gifts given less than seven years will be taxed based on who the gift was given to and the relationship between the gifter and recipient, the value of the gift and when the gift was given. The below items are all classed as gifts – 

  • Household or personal goods (eg. furniture, antiques or jewellery) 
  • Money
  • Stocks and shares listed in the London Stock Exchange 
  • Unlisted shares held for less than 2 years before your death
  • Houses, buildings or land 

Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax free threshold and works as follows – 

  • Gift given 3-4 years before death = 32% tax is applied
  • Gift given 4-5 years before death = 24% tax is applied
  • Gift given 5-6 years before death = 16% tax is applied
  • Gift given 6-7 years before death = 8% tax is applied
  • Gift given 7 or more years before death = 0% tax is applied

If you gift with reservation, in other words, if you give something away that you still benefit from, it will count towards the value of your estate. This includes – 

  • Giving your home away to a relative but continuing to live there 
  • Giving away a caravan but continuing to use it for free when holidaying 
  • Giving away a valuable painting but continuing to display it in your house 

Gift Tax Exemptions 

There’s no IHT to pay on gifts to a spouse or civil partner as long as they live in the UK permanently and you are in a legally binding marriage or civil partnership. Regular payments, including rent for a child, paying into a savings account for a child under 18, or financial support to an elderly relative, are not classed as gifts and thus are not taxable. 

There is an annual exemption on gift IHT, meaning you can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate, this amount can either be gifted to one person or split between several. If you haven’t used your annual exemption, you’re able to carry it over to the next year, but this can only be done for one tax year, running from the 6th April to the 5th April. 

There is a ‘small gift’ allowance, which enables you to give as many gifts of up to £250 every tax year to whomever, as long as the allowance is not used on the same person twice in one year. For weddings or civil partnerships, the tax free gifting allowance is greater. You can give – 

  • £5000 to a child, tax free
  • £2500 to a grandchild or great-grandchild, tax free
  • £1000 to all others

You could also combine a wedding gift with another allowance, apart from the small gift allowance. So, for example, you could also use your annual allowance of £3000 to gift a child a total of £8000 tax free for their wedding. 

Inheritance Tax Relief 

There are two types of relief available – 

Business Relief: BPR can be claimed to reduce the value of a business or its assets, such as property. You can receive 100% relief on a business or interest in a business, and on shares in an unlisted company. You can receive 50% relief on – 

  • Shares that control over 50% of the voting rights in a listed company 
  • Land, property or machinery owned by the deceased that were used in a business they owned or were a partner in. This also applies to those held in a trust that the business has the right to benefit from. 

You can’t claim business relief if – 

  • The company mainly deals with stocks or shares, land or buildings, making and holding investments, or securities 
  • The company is a not-for-profit 
  • The company is being sold, unless the sale is to a company that will continue the business and the estate will be paid largely in shares of that company 
  • The company is being wound up, unless the process is in order to allow the business to continue 
  • The asset also qualifies for Agricultural Relief
  • The asset has not been used for business in the two years before 
  • The asset isn’t needed for future use in the business

Agriculture Relief: APR can be claimed on the transfer of agricultural property. You will receive 50% agricultural relief, except from in the below circumstances, for which you will receive 100% relief – 

  • If the person who owned the land farmed it themselves
  • If the land was used by someone else with a short-term grazing licence 
  • If it was let on a tenancy beginning on or after September 1995

How Is Inheritance Tax Paid? 

Your beneficiaries do not normally pay tax, rather funds from your estate will be used to pay IHT to HMRC which will be carried out by the will executor. However, beneficiaries may have related taxes to pay if, for example, they receive rental income from a house left to them in a will. 

You have six months to pay IHT after death, which HMRC will begin to charge interest on if the payment is not made by the due date. For certain assets, such as property, there is the possibility to pay in instalments. 

Why You Should Plan Ahead for Inheritance Tax

As you’ll know from reading this guide, there are a lot of rules and regulations when it comes to inheritance tax, and it can all get a little confusing. If you’re unaware of the various types of tax relief available and how to leverage them properly, your beneficiaries can end up losing out on a lot of money. 

A common pitfall we often see are estates that are asset-rich but cash-poor, which can result in problems for the beneficiaries if there are not sufficient funds to cover tax liabilities without having to sell assets. 

As part of our IHT planning service, we reduce tax burdens wherever possible, help to provide liquidity of funds, adjust to the ever changing tax laws and ensure fair distribution amongst relatives where required. Get in touch to start planning for your estate and ensure your beneficiaries receive the best tax relief available.