Inheritance Tax Planning
At This is Money we know that Inheritance Tax (IHT) is a concern for many of our readers. So we've partnered with expert financial planners, Flying Colours to help you understand how you can reduce your chance of being caught in its net.
The latest Budget (30 October) introduced new IHT rules around pensions which could affect you.
From 6 April 2027, unused pension funds and death benefits payable from pensions will be included in a person’s estate for IHT purposes.
The government estimates this measure will affect around 8% of estates each year.
The reality is that Inheritance Tax (IHT) doesn’t just affect the very wealthy. We’re living and working for longer, which means we’re accumulating more assets. Homes have gone up in value, which could push your estate (the money and other assets you leave behind) into IHT territory.
And now that pensions will form part of your estate, the risk of being pulled into the IHT net is even higher.
There are several ways to reduce, or even eliminate, the amount of Inheritance Tax that must be paid when you die. However, few are completely straightforward, and usually, a combination of various tools is more beneficial than any single solution. This is called estate planning.
When does IHT apply?
When you pass away, your family could pay 40% IHT on the portion of your estate that exceeds a threshold known as the “nil-rate band”.
In the 2024/25 financial year, the nil-rate band is £325,000. You may also benefit from an additional “residence nil-rate band” of £175,000 when passing your main home to a direct descendant such as a child or grandchild. So, if your estate exceeds £500,000, your loved ones may have to pay IHT.
However, you can pass your entire estate to your spouse or civil partner without IHT, and they inherit your unused nil-rate bands. This means that you can pass on as much as £1 million between you and your spouse, without incurring an IHT bill.
Be aware: If your estate is worth over £2 million, the residence nil-rate band will be tapered. For every £2 your estate is over £2 million (after deducting liabilities but before reliefs and exemptions), the residence nil-rate band will decrease by £1. That means that at £2,350,000 your residence nil-rate band will be zero.
Get advice on IHT and estate planning
For a free, no obligation consultation with an independent financial adviser, book a call with our Client Relationship team.
Don’t let your loved ones get caught in the IHT net!
According to data from HMRC, published in July 2024:
4.39%
of deaths in 2021-22 resulted in an IHT charge
27,800
of estates paid IHT in 2021-22
IHT receipts were
£5.99b
in 2021-22 compared to
£5.76b
in 2020-21
How can you avoid an IHT bill?
If you think your joint estate will exceed £1million, there are various ways to reduce the risk of your loved ones being landed with an IHT bill, which could include:
- Giving it away – there are various rules around the amounts of money you can give to your family during your lifetime.
- Setting up trusts – there are many different types of trust which may be used for IHT planning, but they can be very complex and require careful planning.
- Insurance – the idea is that the insurance pay-out covers the potential IHT bill. In essence, IHT is still payable, but can be met without having to worry about selling property or waiting for probate to be completed.
- Business Property Relief – certain investments, held for over two years, qualify for IHT relief, but they are classed as ‘high risk’ products by the Financial Conduct Authority (FCA). Therefore, you should take professional advice on this form of investing.
Please note, from 6 April 2027, pensions will no longer fall outside of your estate for IHT purposes.
How much does estate planning cost?
Like most financial advisers, our advice fees are based on a percentage of the assets that we advise you on. This is broken down into an initial fee and then, for most clients, an ongoing annual fee.
We can’t provide a price list, because everyone’s finances are different – the cost depends on how complicated your requirements are, and the work involved in helping you.
What Flying Colours can promise is that the initial fee is agreed with you from the outset – and we won’t charge you anything until you’ve agreed on the work you’d like us to do.
Find out how you could benefit from estate planning
To book a free, no-obligation consultation with an independent financial adviser, book a call with our Client Relationship team.
0330 057 0961
This information page is operated by Flying Colours, which is a trading style of Flying Colours Advice Limited who are authorised and regulated by the Financial Conduct Authority (FCA). Our FCA firm registration number is 672022. You can read more on the financial services register at https://register.fca.org.uk
Flying Colours Advice Limited is registered in England & Wales no. 09075635. Registered Office Address: 1301 Ocean House, The Ring, Bracknell, Berkshire, RG12 1AX.
