Inheritance tax planning: Preserving your wealth for the next generation

For many high-net-worth individuals and families, the desire to leave a lasting legacy is deeply personal. Whether it’s passing on a family business, supporting future generations, or contributing to charitable causes, protecting your wealth from unnecessary tax is crucial. Inheritance tax planning ensures that more of what you’ve built benefits the people and causes you care about, rather than going to HMRC.

What Is inheritance tax (IHT)?

Inheritance tax is charged at 40% on the value of an estate above the available allowances. Currently, the standard nil-rate band is £325,000, with an additional residence nil-rate band of up to £175,000 per person available if passing on the family home to direct descendants.

For married couples or civil partners, any unused allowance can be transferred, potentially shielding up to £1 million from IHT. Yet estates beyond this threshold can still face significant tax liabilities without proactive planning.

The impact can be stark: a £2 million estate with no planning could face an IHT bill of over £400,000. However, with the right structures in place, this burden can often be substantially reduced or even eliminated.

The risks of not planning

Without proper IHT planning, your estate could face:

• A 40% tax on amounts above the threshold

• Forced asset sales to meet tax liabilities

• Delays in distributing your estate

• Family disputes or confusion about your intentions

Planning early allows you to mitigate these outcomes and preserve the integrity of your estate. It also ensures your legacy is passed on in a manner consistent with your values and wishes.

Key strategies for inheritance tax planning

1. Gifting during your lifetime

One of the simplest ways to reduce IHT is to give assets away while you’re still alive. There are several gifting rules:

• Annual exemption: You can gift up to £3,000 per year without it being added to your estate

• Small gifts: Up to £250 to as many individuals as you like

• Wedding gifts: Up to £5,000 for a child, £2,500 for a grandchild

• Potentially Exempt Transfers (PETs): Larger gifts are exempt from IHT if you survive for seven years

Gifting from surplus income can also be IHT exempt if it meets certain criteria and is documented correctly. This allows you to reduce your estate steadily while maintaining your lifestyle.

2. Using trusts to control and protect wealth

Trusts allow you to pass assets out of your estate while retaining some control over how they are used. Common options include:

• Discretionary trusts: Flexible and useful for managing wealth across generations

• Bare trusts: Simple and tax-transparent, often used for gifts to minors

• Interest in possession trusts: Beneficiaries receive income immediately, while capital remains protected

Trusts can be powerful tools for controlling wealth distribution and protecting vulnerable beneficiaries. They can also provide a degree of protection from creditors or marital breakdowns.

3. Business and agricultural reliefs

Certain assets qualify for 100% or 50% relief from IHT:

• Business relief (BR): Available on qualifying trading businesses and shares

• Agricultural relief (AR): For farmland and related property

These reliefs are valuable for entrepreneurs, landowners, and family business owners, allowing you to pass on business assets without triggering significant IHT.

To qualify, the business must usually be owned for at least two years and must be a genuine trading entity, not an investment vehicle.

4. Life Insurance to cover IHT liabilities

For some families, life insurance can provide a practical solution. Policies can be written in trust so that the proceeds fall outside the estate and can be used to pay IHT liabilities without forcing asset sales.

This approach offers liquidity and peace of mind, particularly where the estate includes illiquid or hard to sell assets like property or private business shares.

It’s also useful for clients who want to ensure that family members aren’t burdened with tax planning complexities after their death.

5. Investing in IHT efficient assets

Some investment products, such as certain AIM-listed shares or Business Relief-qualifying portfolios, can become exempt from IHT after two years. These can offer a blend of investment growth potential and estate planning efficiency.

They’re especially useful for clients who wish to retain access to capital while planning for the future. However, these investments come with higher risks and should be carefully considered with professional advice.

Family governance and legacy planning

Inheritance planning isn’t just about tax. It’s about aligning wealth transfer with your values. A good adviser will help you address:

• Preparing heirs to receive wealth responsibly

• Clarifying your wishes through wills and letters of intent

• Using philanthropy and charitable foundations to reflect your legacy

• Avoiding disputes through proactive communication and documentation

Legacy planning also involves discussing your intentions openly with loved ones. This can reduce misunderstandings and promote a shared vision of family wealth stewardship.

Regular reviews and legal alignment

IHT legislation evolves, and so do your circumstances. Regular reviews of your plan, will, trusts, and power of attorney documents ensure your strategy remains effective and aligned with current law.

Advisers can also coordinate with solicitors to ensure your financial and legal arrangements work together seamlessly. Keeping everything up to date helps avoid costly errors and ensures your estate is administered smoothly.

A real world example

Consider a client with an estate worth £3 million, including a business and several properties. By establishing discretionary trusts, making regular gifts from surplus income, and investing a portion of the estate into BR-qualifying assets, they were able to reduce the projected IHT liability by over £600,000. Life cover was also arranged to provide liquidity, giving the family reassurance and flexibility.

Such planning doesn’t just save tax, it gives families clarity and confidence during what is often a difficult time.

Final Thoughts

Inheritance tax planning is an act of foresight and care. It ensures your wealth reaches the people and purposes you cherish most, rather than being diminished by tax.

With tailored strategies from gifting and trusts to business reliefs and insurance, you can build a legacy that endures.

Do you know how much of your estate could be lost to inheritance tax? At Oculus Wealth, we help families take control of their legacy through thoughtful, effective estate planning. Book a complimentary consultation to explore your options and preserve your wealth for the next generation.