Navigating the complexities of inheritance tax planning

Inheritance tax planning can feel daunting, especially when you want to protect your estate and support your beneficiaries. For the 2025/26 tax year in the UK, the standard inheritance tax rate remains at 40%, and the frozen nil-rate band of £325,000 continues to apply. There is also a residence nil-rate band of up to £175,000 for individuals passing on a primary home to direct descendants. Although these thresholds have not changed for several years, it remains important to consider how to position your assets to help reduce the eventual tax liability on your estate.

Below, we address some key considerations for owners of small and medium-sized businesses, as well as anyone looking to preserve wealth for their loved ones. Our aim is to share practical guidance, so you can make informed decisions without feeling overwhelmed.

 

Understanding inheritance tax thresholds

Inheritance tax (IHT) applies at 40% on the value of your estate that exceeds the available allowances. In 2025/26, the main allowance – also known as the nil-rate band – is £325,000. If the total value of your assets comes in below this figure, you will not pay IHT. This threshold has been unchanged for a number of years and is scheduled to remain frozen until at least 2030.

For homeowners, there is an extra allowance called the residence nil-rate band. This is set at £175,000 for the 2025/26 tax year when passing a home to direct descendants. It applies on top of the standard nil-rate band, potentially increasing your total tax-free amount to £500,000 per person. As a result, a married couple or civil partners could enjoy a combined allowance of up to £1m if they meet all conditions. However, the residence nil-rate band tapers away for estates valued over £2m, so this is worth checking carefully.

If you’re uncertain how these allowances apply, or how they might interact with your personal circumstances, you can find further information in the official HMRC guidance on inheritance tax.

 

Considering lifetime gifts

One effective way to reduce the eventual size of your estate is to give assets away during your lifetime. The seven-year rule means that if you survive for seven years after making a gift, the gift is usually exempt from IHT. However, gifts may still incur tax if you pass away before the seven-year period has elapsed, with the amount payable determined by the number of years that have passed.

When making gifts, it’s wise to keep records of what you have given away, to whom, and when. You may also want to be mindful of the annual gift allowances. Each individual has an annual exemption of £3,000. This can be carried over for one year if unused, allowing you to give £6,000 in a subsequent tax year without it counting towards the seven-year rule.

 

Using trusts for estate planning

Trusts can play a vital part in IHT planning, particularly if you want to pass on specific assets or protect beneficiaries who might need additional support. A trust places your assets under the stewardship of appointed trustees, who manage them on behalf of the beneficiaries. Since the assets are usually removed from your estate once placed in the trust, this can help reduce the amount subject to IHT if the arrangements meet HMRC’s criteria.

There are various types of trusts, and each has its own tax implications. For instance, setting up a discretionary trust might result in extra charges or periodic tax if the trust’s value surpasses the nil-rate band. To choose a suitable structure, it’s best to get professional advice from accountants and solicitors who understand inheritance tax rules, like us at Stapletons.

 

Exemptions and reliefs

Beyond allowances, several exemptions can reduce the amount of IHT payable. One popular example is the spouse or civil partner exemption: transfers between spouses and civil partners, whether during your lifetime or through your will, are typically exempt from IHT. Business relief is another important consideration for owners of trading businesses or shares in such businesses. Where the criteria are met, business relief can reduce the taxable value of these assets by 50% or even 100%.

Agricultural relief is also available for qualifying farming assets. Additionally, certain gifts, such as those to charities, can be exempt from inheritance tax. When you leave at least 10% of your estate to charity, your estate could qualify for a reduced 36% inheritance tax rate on the remainder.

 

Common mistakes to avoid

Inheritance tax planning can sometimes be overlooked or left too late. Below are some frequent oversights.

1. Failing to write or update a will: Not having a valid, up-to-date will makes it more difficult to ensure your estate is passed on as intended.
2. Ignoring lifetime gifting: Many people forget to use annual gift exemptions or potential tax savings from the seven-year rule.
3. Overlooking pensions and life insurance: Pensions often fall outside your estate for inheritance tax calculations, which can offer additional advantages for wealth transfer. Similarly, certain life insurance policies written in trust can help avoid IHT charges.
4. Not planning for business assets: Many owner-managers assume they’ll get full business relief, but each case is unique. A misstep could mean significant tax charges for your heirs.
5. Misunderstanding trust structures: Placing assets in a trust can help reduce IHT, but it must be managed carefully. Some trusts lead to extra administrative or tax burdens if they’re not set up correctly.

 

Practical tips for estate planning

1. Start earlier than you think is necessary: The earlier you consider IHT planning, the more likely you’ll be able to use allowances and gifting opportunities effectively.
2. Keep precise records: Note down any gifts, exemptions and trust arrangements, so you or your advisers can easily review them later.
3. Review your will regularly: Major life events – marriage, divorce or the birth of children – often require will updates to reflect new circumstances.
4. Explore life insurance: Certain life insurance policies, if written in trust, can help cover your potential IHT bill and ease the burden on beneficiaries.
5. Seek professional advice: Consulting experts can help you avoid pitfalls and take advantage of reliefs, allowances and best practices.

If you’re looking to protect your estate and help ensure your loved ones benefit fully from your legacy, we’re here to provide clear guidance. Our team at Stapletons has a strong background in working with individuals who want peace of mind for the future. We can help you choose the right strategies for your situation and keep you up to date on any regulatory changes.

 

Keeping your assets within reach

While IHT planning involves several considerations, it doesn’t have to be overwhelming. By making use of the available thresholds, exemptions and reliefs, and by structuring your estate so that your beneficiaries receive the maximum benefit, you can reduce tax liabilities and protect assets you’ve worked hard to build.

As a final thought, remember that IHT planning is not just for wealthy households. Even modest estates can become liable for IHT if house values and other assets push them above the thresholds. Starting early, staying informed and seeking professional advice when needed can make all the difference.

Contact us today if you’d like tailored, practical support for your inheritance tax planning. We’re here to simplify the process so you can safeguard what matters most.