How to minimise inheritance tax: Protecting what you’ve built

Inheritance Tax (IHT) is often referred to as a voluntary tax because with the right planning, much of it can be mitigated. Yet each year, thousands of families find themselves paying substantial sums to HMRC, sometimes needlessly. With the current IHT rate standing at 40% on estates exceeding the standard threshold, the tax can significantly erode the wealth you’ve spent a lifetime building.

Even estates that appear modest at first glance, particularly those that include property can exceed the threshold and trigger tax liabilities. But by planning early and using the available allowances and structures, you can reduce the impact and ensure more of your wealth passes to those you love.

1. Make the most of your allowances

The most effective IHT planning starts with understanding your entitlements.

Every individual in the UK benefits from a nil-rate band, currently set at £325,000. This means the first £325,000 of your estate is not subject to IHT. Additionally, there’s a residence nil-rate band of up to £175,000 when passing on your main residence to direct descendants (children or grandchildren).

For married couples and civil partners, these allowances can be combined and transferred, meaning up to £1 million can potentially be passed on free of IHT.

Key tip: Review your will to ensure your estate is structured to fully utilise both the standard and residence nil-rate bands. Without appropriate planning, these allowances can be partially or wholly wasted.

2. Use lifetime gifting strategically

One of the most powerful tools in IHT planning is giving assets away during your lifetime. Gifts made more than seven years before your death are generally exempt from IHT under the ‘seven-year rule’. These are known as Potentially Exempt Transfers (PETs).

There are also annual allowances that allow you to give regularly without affecting your estate:

• Annual exemption: You can gift up to £3,000 per tax year without incurring IHT. This can be carried forward one year if unused.

• Small gift allowance: You can give up to £250 per person per tax year to as many individuals as you like.

• Gifts from surplus income: If you have more income than you need for day-to-day expenses, you can gift the excess regularly without it counting towards your estate for IHT, provided it doesn’t affect your standard of living.

Key tip: Keep good records of all gifts, especially those made from income, and seek professional advice to ensure they qualify under the relevant rules.

3. Consider the use of trusts

Trusts are a versatile and powerful tool in estate planning. They can help reduce the value of your estate for IHT purposes while allowing you to retain control over how and when your assets are accessed.

Types of trusts to consider include:

• Discretionary trusts: Useful for families who want to delay or control how much beneficiaries receive and when. Assets are typically removed from the settlor’s estate after seven years.

• Loan trusts: The settlor lends a sum to the trust, which is then invested. The original loan remains part of the estate, but any growth is outside it.

• Discounted gift trusts: Ideal for those wanting to make a gift but retain an income stream. A portion of the gift is immediately outside the estate based on the settlor’s age and health.

Key tip: Trusts can be complex and may have their own tax implications. It’s essential to seek expert advice to set up the right type of trust for your goals.

4. Invest in IHT exempt assets

Certain investments qualify for Business Relief (BR), which can reduce the value of these assets for IHT purposes by up to 100% after a two-year holding period. Examples include:

• Shares in qualifying AIM-listed companies

• Investments in unlisted trading businesses

• Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS)

While these can offer valuable tax benefits, they come with higher levels of risk and should only be considered within the context of a well-diversified portfolio and with professional advice.

Key tip: Business Relief investments may also provide quicker IHT relief than trusts (after two years instead of seven), making them a useful tool for late-stage planning.

5. Use life insurance as a planning tool

If your estate is expected to incur a significant IHT bill, a whole of life insurance policy written in trust can provide a tax-free lump sum on death to help cover the liability. This means your heirs won’t need to sell property or other illiquid assets under time pressure just to pay HMRC.

Key tip: Always ensure the policy is written in trust, otherwise, the proceeds may be included in your estate, defeating the purpose.

Take control of your legacy

Inheritance tax planning isn’t about finding loopholes, it’s about being proactive, thoughtful, and structured in your approach. The earlier you begin planning, the more options you have and the greater the opportunity to make a lasting impact.

Whether your goal is to support your children, leave a charitable legacy, or simply ensure that your estate is passed on efficiently, taking action today can save your beneficiaries a significant burden tomorrow.

Ready to reduce your estate’s IHT exposure?

At Oculus Wealth, we offer bespoke estate planning advice tailored to your circumstances and goals. Book a consultation today and start building a plan that protects your legacy.