Minimising the effect of inheritance tax
What you need to know
- Without proper planning, the taxman can take 40% of your wealth
- There are two keys to unlocking a successful IHT strategy – plan early and use the available reliefs
- Trusts and family investment companies can help you pass on wealth while keeping your hand on the tiller
- Keep a record of any lifetime gifts, and ensure your family know your advisers and have access to key documents in case of unexpected circumstances
When reviewing their family succession and investments, many families wish to consider their inheritance tax position.
In this guide we outline how IHT works, consider some of the main reliefs and suggest some succession planning strategies. Rothschild & Co does not provide tax advice and you should contact a tax adviser before making any financial decisions. We work with a network of tax experts who can help you make the best decision for your circumstances.
Understanding inheritance tax allowances
IHT is levied when a person dies and is normally paid by your estate rather than your heirs.
The first £325,000 of your estate can be passed on tax free. This is called the 'nil-rate band'. In addition, if your deceased spouse didn't utilise their nil-rate band, then your estate may be able to benefit from their allowance as well, meaning £650,000 can potentially be passed on free of tax.
For those estates which are liable to pay, the headline rate is normally 40%. Any IHT due on death must be paid to HMRC by the end of the sixth month after the person's passing.
Even if you're not tax resident in the UK, you may have an IHT exposure on assets you own which are situated in the UK. And since 6 April 2025, overseas assets could also be subject to IHT if you are considered a long-term UK resident.
It is worth noting that most gifts to individuals are not liable for IHT as long as the person making the gift survives for seven years. A basic rule of succession planning is therefore to make your gifts early and pass on assets which are likely to increase in value.
However, always consider the capital gains tax (CGT) consequences as this can be applied to gifts.
The key to successful IHT mitigation is to plan early and to make maximum use of the available reliefs."
Inheritance tax calculator
Use the Gov.uk calculator to estimate the value of an estate, including the deceased's money, property and possessions, and find out whether inheritance tax is likely to be due.
Passing on the family home
For many people, the family home is their main asset and this is subject to IHT, although any mortgage is deductible in calculating its value for IHT purposes.
It can be difficult to minimise IHT on your home. If you give your property away but still live there then it will remain liable for IHT.
Ways to reduce IHT include using the spouse exemption, taking out life assurance to cover the IHT bill, downsizing and giving away the spare cash realised, or using equity release.
If you leave your house to your children or grandchildren in your will, the gift could benefit from the 'residence nil-rate band'. This is a tax-free allowance of £175,000, although it starts tapering off for estates worth more than £2 million.1
Reducing your IHT bill
The key to successful IHT mitigation is to plan early and to make maximum use of the available reliefs.
A useful tool that is commonly overlooked is the 'normal expenditure out of income' relief. If your annual income exceeds your outgoings you can give away the excess without an IHT charge, even if the gift is to a trust. There is no seven-year survivorship condition.
Business Relief (formerly known as Business Property Relief) can reduce the IHT payable on any of your qualifying business assets, while Agricultural Relief can reduce the tax payable on qualifying agricultural assets.
Since 6 April 2026, you have generally been able to claim 100% relief on up to £2.5 million of combined business and agricultural assets. For qualifying assets above this allowance, you can still claim 50% relief.
If you are married or in a civil partnership, any unused allowance from your late spouse or civil partner may be transferred to you, potentially increasing the amount eligible for 100% relief to £5 million. However, different eligibility and ownership conditions apply, so plan early.
Prudent use of the smaller IHT reliefs on a regular basis can also reduce the impact of IHT on your estate. Every taxpayer has an annual tax-free amount of £3,000 and so regular gifts should be considered. You can carry the £3,000 forward one tax year and so, if you have not used this relief before, you can gift £6,000 in the first year.
There are also reliefs available for gifts made on marriage, so consider these if you're closely related to the happy couple.
Other reliefs to have in your armoury are assets held in a pension, which can currently be passed on free of IHT. However, this will change from 6 April 2027, when most unused pension funds and pension death benefits will fall within the scope of IHT.
With regards to charitable giving, if your will leaves at least 10% of your estate to charity, the rate of IHT on your estate can be reduced to 36%. Gifts left to charity are not subject to IHT.
Passing on wealth and wisdom
This is where tax starts to go beyond numbers on a spreadsheet. Many parents want to reduce their IHT bill but are concerned that passing wealth to their children may demotivate them.
Our Client Advisers can act as a sounding board on these issues, including how to talk to your children about wealth and how other families have structured their finances.
From a tax perspective, families often address this dilemma by creating trusts so that they can continue, as trustees, to control how the monies are invested or used.
It's also increasingly common for families to use a family investment company (FIC) to square the dilemma of early IHT planning and retention of control over the wealth.
Remember a will is an essential part of an IHT strategy and should be reviewed every few years, or when there is a change in family dynamics. Make sure to keep all your financial documents in order to make it easier for your heirs to manage your finances after you're gone.
Many parents want to reduce their IHT bill but are concerned that passing wealth to their children may demotivate them."
Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.
