- Inheritance tax (IHT) – a reminder of the basic rules
The nil rate band (NRB) is £325,000. So, there’s no IHT on the first £325,000 of your estate. Any unused NRB can be transferred to a spouse. So, a married couple can leave combined estates of £650,000 without the beneficiaries having to pay any IHT. On top of this, there’s additional relief of up to £175,000 for estates that include property which has been the deceased’s main residence. So, this adds another £350,000 to a couple’s IHT-free estate, making It £1m between them. Please note that the additional NRB applicable to a main residence is tapered (reduced) for estates in excess of £2m.
- IHT on your business
We’ve heard lots of noise from farmers over the past few months about changes to agricultural property relief (APR). However, it’s not just the farmers that will be impacted.
Currently, a form of IHT relief known as business property relief (BPR) gives an exemption to IHT on the value of your business (or shares in your business); that exemption is uncapped, so you could die and pass on your shares worth (say) £5m and there would be no IHT to pay.
But, from 6th April 2026, only the first £1m will qualify for 100% BPR with the rest being given BPR of 50%. So, in my example above, there would be no IHT to pay on the first £1m but, on the remaining £4m, only £2m (50%) of it would get BPR – with the other £2m being subject to 40% IHT. So, that’s going to cost your beneficiaries £2m x 40% = £800,000.
This brings us on to ‘big’ questions like:
- How much is your business worth?
- Who are you planning to leave your business to?
- Does your will provide for your wishes?
- Where will the beneficiaries find the funds to pay the IHT?
Over the coming weeks we’ll be running a webinar on this topic. Remember, this change take effect in April 2026, so you do have time to plan for it.
- Gift assets now
If you start to ‘get rid’ of assets in your estate now, and survive for seven years, there will be no IHT to pay on them. If you die within three years there will be no IHT relief and the assets you gave away will be treated as if you still owned them on death and will be included within your estate value for IHT purposes. If you die in the 3-7-year window after gifting the assets, the rate of IHT payable on the assets you gifted will be tapered, dropping annually as you approach the seven-year point. However, speak to us before making any such gifts as there could be some other tax consequences (e.g. capital gain tax issues). Note (below) that there are certain ‘special IHT allowances’ which you can use up each year and on special occasions which lie outside of the above rules and which will be exempt for IHT purposes.
- Surplus income
If you give assets away (this includes cash) say to your children each year and the amount can be shown to be ‘out of normal income’ then even if you die within seven years there is no IHT to pay. This would apply if you have quite a high income, in excess of your normal living expenses. So, if a Premier League footballer was to set up a monthly standing order to his kids for £50,000 per month(!) he could argue that, although his estate is being ‘given away’, the monthly ‘gifts’ are covered by the ‘out of normal income’ rule and therefore, if he was to die, the gifts would not be ‘clawed back’ into his estate. There’s no hard and fast rule about how much you can gift in this way – so long as the amount you’re giving away is ‘reasonable’ in relation to your income then it’s okay.
- Special IHT allowances
You can give away £3,000 per annum (to anyone) and, if you die within seven years, it won’t be treated as part of your estate on death for IHT purposes. If you didn’t do this last tax year (2023/24) then you can double up this time round and give away £6,000 by 05/04/25 as you’re allowed to carry this allowance forward by one tax year. There’s also a special exemption for gifts on marriage – £5,000 for your children, £2,500 for grandchildren and £1,000 for anyone else.
- Leaving some of your estate to charities
By leaving at least 10% of your net estate to charities, the IHT rate on the remainder of your estate will be reduced from 40% to 36%. If this is something you’d like to consider, make sure you get your will drafted accordingly.
- IHT and your pension pot
Currently, your pension fund lies outside your estate for IHT purposes. But, following last year’s Autumn Budget, most pensions savings and death benefits will fall within a person’s estate for IHT purposes from 6th April 2027.
Again, watch out for a forthcoming webinar on this topic.
- Protect against IHT payable
It’s the beneficiaries of your will that will pick up the tab for any IHT payable. You can protect them from any exposure to IHT by taking out a life insurance policy that will pay out a sum, on your death, that will cover any IHT payable by them. If you have given away, or plan to give away assets and the amount of IHT payable will depend on how long you survive (remember that you’d have to survive a full seven years for the value of these gifts to be fully exempt from your estate) one nifty trick is to take out a series of life policies that will pay out the sums required to cover the IHT. For example, if you were to die 4 years after making the gift, the IHT payable would be more than if you were to die 5 years after making the gift (because of the tapering of IHT in the 3-7-year window. I can advise you on this if it’s relevant to you and if you want to consider it.
