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Inheritance Tax Planning (Part 1)
Christina Douglas, Financial Advisor from Lumin Wealth, joins this episode as a guest of Davidson Deem (which is an appointed representative of Lumin Wealth Management Limited).
Christina offers her expert insight into Inheritance Tax Planning, addressing the most commonly asked questions on the topic. All information given in this episode is correct at the time of recording in February 2026.
Inheritance Tax Planning (Part 1)
Christina Douglas, Financial Advisor from Lumin Wealth, joins this episode as a guest of Davidson Deem (which is an appointed representative of Lumin Wealth Management Limited). Christina offers her expert insight into Inheritance Tax Planning, addressing the most commonly asked questions on the topic. All information given in this episode is correct at the time of recording in February 2026.How does inheritance tax work? Could it affect my estate?
Yes, it could well affect your estate, depending on the total value, because inheritance tax is a tax on the value of your estate when you die. In the UK, if your estate is above the nil rate band threshold, inheritance tax might be due at 40% on the value above that threshold. Your estate includes things like property, savings, investments and certain gifts made within the seven years before you die.What allowances or exemptions are available to reduce inheritance tax?
- The key allowances are firstly your nil rate band. That’s the basic threshold below which there is no inheritance tax charged. This is currently at £325,000 per person.
- Then there’s the residence nil rate band. This is an extra allowance where you pass your main residence – your home – to direct descendants, so your children or stepchildren. That’s currently set at £175,000.
- Transfers between spouses or civil partners are exempt from inheritance tax, and you also get an annual gifting allowance where you can give away a certain amount each year, tax-free. That’s currently £3,000 per year per person.
- There are also other exemptions for gifts on marriage, small gifts, and donations to charities and political parties.
What steps can people usually take to reduce inheritance tax?
- The first one, which is usually the favourite, is to spend your money. You can buy holidays and things like that to reduce the size of your estate.
- Next is to use your annual exemptions of gifts each tax year. You can also make larger gifts which are exempt from tax if you survive for the seven-year period. Leaving money to charity can reduce the inheritance tax rate to 36%.
- Then, you’ve got financial planning. Trusts, life insurances and certain types of investments can reduce the total value of your estate. It’s a good idea to review your Will and asset ownership structure regularly, as well.
How do gifts work when it comes to inheritance tax?
If you live for seven years after making a gift, it will usually fall outside of your estate for inheritance tax purposes. If you die within seven years, depending on the value of the gift, tax may be due based on a tapering scale. The tax reduces the longer you survive after the gift was made. There are some exemptions that don’t count as gifts, such as a wedding present, for example, depending on how the recipient is related to you.What options are there for passing on money or assets tax efficiently?
- Again, making gifts can be a good one. Setting up assets or investments in certain types of trusts can also be tax-efficient.
- Owning assets jointly with other people can help, or making gifts to charity or considering life insurances to cover inheritance tax bills.
- Pension death benefits can also be an option, but this is subject to change from April 2027. Each solution has pros and cons depending on your individual circumstances.
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How does owning property affect inheritance tax?
Your main residence, where you live day-to-day, usually gets an extra allowance if it’s passed on to direct descendants. That’s the residence nil rate band. Larger properties can still create significant inheritance tax exposure, though.
If you don’t leave the property to direct descendants or that’s not an option, you may lose that allowance. Also, if your overall estate is worth over £2 million, this allowance begins to taper down.
Are pensions or savings treated differently for inheritance tax?
Pensions are currently outside of your estate for inheritance tax. If you pass away before the age of 75, your beneficiaries could receive the funds tax-free. If you pass away after age 75, the beneficiaries could pay income tax on withdrawals.
However, the rules are changing from April 2027, at which point pension pots will form part of your estate for inheritance tax purposes.
Savings and most investments are also part of your estate for inheritance tax. However, some types of investments can fall outside of your estate after two or seven years, depending on the type of investment and the structure – if it’s in a Trust, for example.
How can life changes impact inheritance tax planning?
Various major life events can change the liability, such as marriage or divorce, buying and selling property, or having children or grandchildren.
Receiving an inheritance yourself can obviously increase the value of your estate, too. Starting a business could also have an effect, as certain reliefs may be available that can affect allowances, thresholds, ownership and how you want things to be passed on.
When should inheritance tax planning be reviewed or updated?
It’s best practice to review it after any major life changes or annually, if you can. You should also check it through after any changes in tax law. The Autumn Budget tends to have an impact on these allowances – especially in the last couple of years.
When your assets grow significantly is another key time. Unfortunately, inheritance tax planning isn’t something you set up and forget about. It has to be reviewed regularly.
How important is a Will when it comes to inheritance tax?
A Will is essential. Without one, your estate will become intestate, and will be distributed by default rules as set by the government. That could mean there is more tax to pay than necessary.
It could also cause disputes between the beneficiaries that you want to receive your assets. A Will allows you to use your allowances and exemptions efficiently.
How can a financial advisor help with inheritance tax planning? Any final thoughts?
We can help you assess your current inheritance tax exposure, recommend tax-efficient strategies and help you use all the allowances available to you. We can also coordinate with solicitors to look at your Will, as well as tax planners.
We can also support a longer term view and continue to review your plans with you – at least annually. That can save your family substantial tax – and stress, as well – when that time does finally come.
The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
TAX PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Inheritance Tax Planning (Part 2)
What are the individual and joint inheritance tax allowances?
Every person in the UK has two key allowances that form the foundation of inheritance tax planning. First is the nil rate band at £325,000. This is the amount each individual can pass on without paying inheritance tax.
Then you’ve got the residence nil rate band, which is up to £175,000. This has a few caveats. It only applies when leaving a main residence to direct descendants such as children, grandchildren and stepchildren. Also, if your entire estate is worth more than £2 million, it starts to taper down.
Taken together, you could pass on up to £500,000 tax-free if the right conditions are met. Also, assets between married couples pass tax-free, and any unused allowances transfer, meaning that they could pass on up to £1 million in total without inheritance tax being due.
How do you avoid inheritance tax on property?
The residence nil rate band is key here, as long as the home is left to direct descendants, and the entire estate isn’t larger than £2 million. Over that level, that £175,000 relief tapers down. For every £2 over £2 million, it reduces by £1.
You also can’t pass your main residence on to your children and continue to live there rent-free. That’s classed as a gift with reservation – you would either need to pay market rate rent or think of other planning strategies.
How do the rich avoid inheritance tax?
It’s about planning as early as you can for inheritance tax and understanding the reliefs available.
These could include agricultural relief for farmers, long-term gifting, the use of Trusts, and business relief. From April 2027, pensions form a big part of these plans as well. It’s important to know what the reliefs are and when to use them.
How do you avoid inheritance tax with a Trust?
Trusts are definitely helpful, but they’re not a full loophole. A Trust allows you to continue to have control over your assets. Essentially, the money goes into an investment that’s wrapped in a Trust. You can say who the beneficiaries are – either by class, such as all grandchildren, or by naming individual people.
Then you have Trustees, who essentially act as the management team, and a Trust document, which is the rule book of the Trust.
It still forms part of your estate for the first seven years, but growth can sit outside of the estate from day one. Trusts can be really helpful if you still want control over the asset. They do have different costs, such as set-up fees and ongoing charges.
How do you avoid inheritance tax after death?
The options do become very limited. The main tool is called a Deed of Variation. This allows beneficiaries to redirect assets to a new beneficiary, which could include charities.
If your child, for example, was set to receive an inheritance but that would cause implications for their own tax status, they could redirect it on to your grandchildren. It would just involve completing a form with your solicitor.
How do you avoid inheritance tax on farms?
Farmland can qualify for agricultural relief, which can reduce the taxable value of farm property. There are conditions that need to be met with HMRC, so if that applies to you, it’s worth investigating.
Does a Deed of Variation avoid inheritance tax?
It can reduce inheritance tax by redirecting the assets or increasing charitable gifts. It doesn’t avoid inheritance tax outright.
On charitable gifts, if you give more than 10% of your overall estate to charity, the rate of inheritance tax reduces from 40% down to 36%.
Can I use equity release to avoid inheritance tax?
Equity release does technically reduce the size of the estate, but it’s not an inheritance tax planning strategy in itself. It reduces the estate because you’re borrowing against your property.
That creates a debt, which obviously attracts charges and interest rates. Once you pass away or the house is sold, the debt is repaid. That lowers the overall net value of your estate, but it doesn’t offer any special tax benefits. Technically, you could do this, but it isn’t a common reason to use equity release.
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Should I get married to avoid inheritance tax?
Marriage does have strong tax benefits, as assets passing between spouses or civil partners are exempt from inheritance tax. Any unused allowances transfer between spouses, helping to reach £1 million before inheritance tax becomes payable.
If one half of the couple has more assets than the other, those unused allowances could be used together. But ideally you’d want to enter into a marriage partnership for other reasons.
Can I buy my parents’ house to avoid inheritance tax? Can I give my house away to avoid inheritance tax?
If you give away an asset but still benefit from it, HMRC treats it as though you never gave it away. It’s classed as a gift with a reservation of benefit. Giving your house to your children while continuing to live in it doesn’t work, unless you pay them market rent.
If you bought your parents’ house below market value, again, that can create new gifts that still sit inside the estate for inheritance tax. You need to pay full value and be in a position to do that without affecting your quality of living. Your parents would then have a substantial amount of cash, which would form part of their estate. It’s not an easy loophole.
How much can I give away to avoid inheritance tax?
Each person gets an annual exemption, where they can give assets worth £3,000 away each year. If you don’t use the last tax year’s allowance, you can use it this tax year, but you can only go back one year.
If you didn’t make a gift last year, you could give away £6,000 this tax year. For a married couple, that becomes £12,000.
There’s also the small gift allowance of £250 per recipient, as long as they haven’t already benefited. Also, if you have a child or stepchild that’s getting married, you can gift them £5,000 and it is immediately outside of the estate. You can also gift £2,500 to grandchildren on marriage.
You can absolutely make larger gifts, too, but those stay inside your estate for seven years. You just need to be aware of that seven-year rule.
Can executors donate to charity to avoid inheritance tax?
Charitable gifts are exempt from inheritance tax, and giving 10% or more of the estate reduces the rate of inheritance tax from 40% to 36%. Executors for your Will could redirect funds to charity via a Deed of Variation, provided all the beneficiaries agree.
Can I avoid inheritance tax with a self-invested personal pension (SIPP)?
Under the current legislation, pensions sit outside of the estate for inheritance tax. That means they can be passed on tax efficiently. In retirement, they’re generally the last asset you touch.
However, from April 2027 they will form part of your estate for inheritance tax purposes – so your estate could increase significantly overnight. It’s an area that needs very careful thought.
Can inheritance tax be avoided with a limited company?
A limited company does not automatically remove assets from inheritance tax. It depends on the structure, who owns the shares and whether the underlying business qualifies for relief.
It’s not a straight yes or no, and there are a lot of variables. We would need to review that on a case-by-case basis. You need an expert to help you navigate that one.
Does a joint bank account avoid inheritance tax?
Not necessarily. HMRC looks at the beneficial ownership, not whose name is on the account. If you owned 100% of the money before adding someone else, HMRC could still treat that as part of your estate. It’s not as easy as just adding your son or daughter to your bank account later on in life.
We’ve covered a lot across our two episodes. Is there anything else to consider here?
My final point is that you should start early with inheritance tax. Planning in your 70s and 80s does limit the options available, especially around the seven-year rule for assets to pass out of your estate.
Good inheritance tax planning isn’t necessarily about clever tricks. It’s more important to understand the rules, exemptions and reliefs and to use as much of those as possible.
Key Takeaways:
- Assets passing between spouses or civil partners are exempt from inheritance tax, and unused allowances transfer, potentially allowing a couple to pass on up to £1 million tax-free.
- Inheritance tax planning should start early to take full advantage of the seven-year rule, which dictates the period assets must be outside of your estate to be fully excluded from tax.
- The nil rate band is £325,000 per person, and the residence nil rate band is up to £175,000, which only applies when leaving a main residence to direct descendants and begins to taper if the total estate value exceeds £2 million.
- If you give away an asset, such as a house, but continue to benefit from it (a ‘gift with reservation of benefit’), HMRC will still treat it as part of your estate unless you pay market rate rent.
- Under current legislation, pensions sit outside of the estate for inheritance tax, but this is set to change in April 2027 when they will begin to form part of your estate for tax purposes.
The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
TAX PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.