IHT: An introduction

IHT is a tax on the estate of someone who has died, including all their assets such as property, savings, investments, and valuables. The standard IHT rate is 40%, but this only applies to the value of the estate that exceeds a certain threshold, which is known as the nil rate band

Inception
In 1986 the Government introduced a unified tax system to replace previous death duties. It was designed to tax the transfer of wealth from deceased individuals to their heirs, in a system built on the idea that large estates and inherited wealth should contribute to state revenues, given the increasing concentration of wealth among the more affluent in society

Since the 2009/10 financial year, the nil rate band has been fixed at £325,000 per person, which means that an estate worth less than this amount is not subject to IHT. For estates above the threshold, the 40% rate applies to the value above £325,000

IHT in 2025
The previous Conservative Government froze both the nil rate band and the residence nil rate band at these levels until 2025/26. Last October, the Labour Government’s Budget extended this freeze until 2028/29

What's next?
Proactive planning, such as that required for lifetime gifting and setting up
a Trust, should start as soon as possible, regardless of the April 2027 horizon. There are ways to help mitigate IHT for your loved ones

Trusts: For years, pensions have been a primary tool for avoiding IHT, often outpacing their role as retirement funding mechanisms. Wealthy individuals have relied on pensions to pass assets tax-free to their families. The new IHT rules significantly impact pension planning, especially for those using pensions as IHT shelters. Trusts – particularly Flexible Reversionary Interest Trusts – offer an effective means of preserving wealth. Making use of lifetime gifting into Trusts to mitigate IHT while protecting and preserving family wealth intergenerationally

Gifts inter vivos: Gifts made to anyone from an individual’s estate are exempt from inheritance tax if they survive for a period of 7 years from the date the gift is made. The most common way of protecting the beneficiaries of these gifts from the potential tax liability is to set up life assurance policies to cover the reducing liability. These policies have a fixed 7-year term, with cover reducing in steps to match the reduced liability as taper relief takes effect

Conclusion
Working with a professional will ensure that an individual’s estate is structured in a way that maximises their potential for tax savings, and that their beneficiaries are best positioned to receive the full benefit of their legacy

Seeking professional advice will help identify any potential pitfalls or overlooked opportunities, thus ensuring that estate planning is as efficient and effective as possible

*This information should only be seen as a guide and does not constitute formal tax or financial advice. Please seek professional advice*