Inheritance Tax Planning – everything you need to know

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Last updated: November 7, 2022

This week I have been working on an Inheritance Tax (IHT) Plan for a client so that they can reduce a potential tax bill for their children.

There are some rules and allowances that they weren’t aware of, so I’ve written an intro to IHT and a summary of the dos and don’ts here, as it struck me that this could be useful for many others out there, too.

Before I start, I want to emphasize that talking about death can feel a little morbid but planning ahead makes life so much easier for those you decide to leave your wealth to. So, I hope this blog provides reassurance rather than worry.

Firstly, what are the IHT thresholds?

Each individual can leave £325,000 on death which is 100% free of IHT. This can be left to anyone they nominate. However, if assets are transferred to a spouse, even if it’s over the £325,000 allowance, it’s IHT free and the spouse will receive the full £325,000 allowance to utilise on their subsequent death.

If you leave funds that are over £325,000 to anyone other than your spouse, an IHT charge is payable. At present, the IHT rate is 40% on anything over the allowance, so it can be easy to rack up a bill on death for your beneficiaries.

Something that few people are aware of is a new residential nil rate band. In addition to the £325,000 allowance, each person has an additional £175,000 for use against their main residence. This can only be used up to the value of the property if lower than £175,000 and the estate must go to a direct descendent (i.e., child or grandchild) to qualify. Remember, transfers to spouses are IHT-free.

To put the above into context, assuming a married couple has an estate of £1 million and the property is worth £400,000 of this, on second death there will be no IHT if the estate is left to their children. (£325, 000 per deceased plus £175,000 each for the property = £1 million).

There is a catch, however. For every £2 that the estate is over £2 million, the residential nil rate band is reduced by £1.

 So, we’ve run through the thresholds, but what about the allowances to reduce the bill?

Firstly, defined contribution pension plans are usually free of IHT. Therefore, pensions are a great tool to pass wealth on. There are also a number of allowances available throughout your lifetime as follows:

Annual Exemption

You can gift away up to £3,000 each per tax year. This is automatically exempt from IHT upon death. Any unused allowance can be carried forward for one year.

Small Gifts Exemption

Gifts of up to £250 are exempt from IHT and can be made to as many individuals as you like in one tax year.

Marriage / Civil Partnership

The first £5,000 of a gift by a parent to a child on marriage is exempt from IHT and the first £2,500 by a grandparent. (£1,000 for anyone else).

Normal Expenditure

You can gift away any surplus income each year without any liability to IHT. For the gifts to qualify, they must come from income, be regular/habitual, and not reduce your normal standard of living. Please note, HMRC looks at these gifts carefully if a claim is made at death, so it’s important to keep good records both of gifts made and routine spending.

Over and above these allowances, additional planning can be done to reduce IHT.

This might include insurance policies to pay the tax bill, gifting outright (PET) or via a Trust (CLT) and investing into investments that benefit from IHT relief.

Potentially Exempt Transfers (PETs) 

Any gift which does not fall outside of your estate immediately by virtue of the above exemptions is deemed a PET. This will allow you to make unlimited direct gifts of cash, shares, or other items of value. After 7 years, the PETs fall out of the estate for IHT purposes. Should you die within 7 years, however, an IHT charge of up to 40% may become payable on any part of the gifts in excess of the £325,000 nil rate band.

Chargeable Lifetime Transfers (CLTs)

Any gift that is not outright and that is wrapped into a Trust is classed as a CLT. This means that, if the gift is in excess of the £325,000 allowance, an immediate IHT charge is applied. Like a PET, CLTs will fall outside of your estate after 7 years but you need to ensure no further gifting has taken place since the initial gift, as this could see the 7-year clock extended from the latest gift.

These areas can get complex, so I’d recommend speaking to us at Stephen Eve Financial Planning if additional steps are needed. I’d also recommend having up-to-date Wills and Lasting Powers of Attorney in place so there are no legal issues in the event of death or earlier incapacity.

IHT can feel overwhelming but a Financial Planner’s job is to provide clarity, ensure you understand your options, and feel in control. Get in touch if we can help.

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.


The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.

Tax treatment varies according to individual circumstances and is subject to change. Please note that the FCA does not regulate will writing, tax planning and trusts.