What to consider for inheritance tax planning

HMRC figures show inheritance tax receipts reached £7.03bn in the 2023/24 tax year, an increase of 5% on the previous year.

How do inheritance tax allowances work?

Each individual has an inheritance tax nil-rate band. This is the amount they can pass on free of inheritance tax, either on their death or by making gifts in the seven years before their death.

There is also a residence nil-rate band of £175,000, which applies where the deceased’s home passes to their direct descendants.

Both allowances are transferable between spouses, meaning a married couple could pass up to £1m to their children or other descendants. Any amount above the available nil-rate bands is subject to inheritance tax at 40%, unless it qualifies for an exemption.

One reason inheritance tax receipts are increasing is that the nil-rate band, which previously increased most years, has been fixed at £325,000 since 6 April 2009 and will remain frozen at this amount until 5 April 2031. The residence nil-rate band has been fixed at £175,000 from 6 April 2020 and will remain at this level until 5 April 2030.

With property and investment values having risen over time, more families may find that inheritance tax affects them. Effective planning during your lifetime can help reduce the potential liability and ensure more of your wealth passes to your chosen beneficiaries.

What inheritance tax planning should you consider?

Steps worth considering include:

• Using your gifting allowances: you may be able to give away up to £3,000 each tax year using the annual exemption, together with certain small gifts and gifts made on marriage or civil partnership
• Making regular gifts from surplus income: gifts that form part of a regular pattern, are made from income and don’t reduce your usual standard of living may qualify for an important inheritance tax exemption
• Making larger lifetime gifts: some gifts to individuals may fall outside your estate if you survive for seven years, although careful planning and record-keeping are essential
• Reviewing your will: a well-drafted, tax-efficient will can make full use of available exemptions and reliefs
• Reviewing business and agricultural assets: specialist reliefs may be available, but the conditions are complex and should be considered well in advance
• Keeping your estate plan under review: changes in family circumstances, asset values and tax legislation can all affect the suitability of existing arrangements.

Inheritance tax planning is rarely a one-size-fits-all exercise. Taking advice early can provide more options and help ensure any planning supports both your financial security and your wishes for your family.