Practical tax information to help you navigate through the tax system and plan tax efficiently by providing you with an overview of the key tax rules.
Throughout this guide you will find a number of tax tips and checklists to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action. We would be happy to help with advice on your specific position.
The rules, rates and allowances in this guide relate to the 2025/26 tax year and these may be different for other tax years.
Preserving the inheritance
Inheritance tax (IHT) has some unique features and may be charged on some lifetime gifts, not just on an individual’s death estate. Planning to minimise IHT is something that many put off until it is too late and early attention to this tax is almost always worthwhile.
The basics
IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime.
There is a minimum threshold for paying IHT (also called the nil rate band or NRB) which is set at £325,000. This threshold has been frozen until April 2030 and has been at this level since 2009/10. This means more and more estates are falling within the charge to IHT.
Lifetime gifts
Many lifetime gifts are treated as ‘potentially exempt transfers’ (PETs). This includes gifts made to individuals. There is no immediate charge to IHT on PETs and, as long as the donor lives for at least seven years after making the PET, there will be no possibility of an IHT charge whatever the size of the gift.
If the donor does not survive seven years from the date of the gift the IHT will be payable on any amounts in excess of the NRB.
| Tax Tip |
|---|
|
Even if the donor does not survive seven years from the date of the gift then it is still beneficial to make lifetime gifts where affordable. IHT will be based on the value of the asset when it was originally gifted and not on the value at the date of death. In addition taper relief (see below) will reduce the IHT payable where the donor has survived at least three years from the date of the gift. |
Whilst gifts to individuals are PETs, most gifts to trusts are considered ‘chargeable lifetime transfers’ (CLTs) and are subject to IHT at the lifetime rate of 20% to the extent the total amount of CLTs exceed the NRB over a seven year period.
| Tax Tip |
|---|
|
One of the key benefits of trusts is that the donor may be able to retain control over their assets (unlike a direct gift to a beneficiary). In addition the NRB is applied on a seven year rolling basis so where gifts are carefully managed, it may be possible to transfer significant sums without an IHT liability. Finally, the lifetime rate of IHT is lower than the death rate, and where the donor survives seven years from the date of the gift into the trust, no further IHT will be payable. |
The rules concerning trusts are very complex but they can have a number of benefits, both tax and otherwise. Please get in touch if you are interested in making gifts to trusts.
Death estate
As a result of the freezing of the NRB and the fact that many individuals are not able to make substantial lifetime gifts from an affordability perspective, an increasing number of estates incur an IHT liability on death.
IHT is also payable on death on any gifts (whether PETs or CLTs) which have been made in the seven years prior to death.
The rate of IHT payable on the death estate and chargeable gifts (where in excess of the NRB) is 40%.
Exemptions and reliefs
A number of exemptions and reliefs can apply either to reduce the value of transfers or the IHT payable. Some of these apply only to lifetime transfers and others apply both to lifetime gifts and the death estate.
Annual exemption
Each individual benefits from an annual exemption of £3,000 per donor per year for lifetime gifts which can be carried forward for one year if unused.
| Tax Tip |
|---|
|
Timing of gifts in a tax year can be critical. The annual exemption is applied to the first gift made in the tax year, even if that gift is a PET. If you plan to make gifts to trusts, it may be preferable to make these earlier in the tax year. |
Normal expenditure out of income
An exemption applies where an individual makes habitual or regular gifts to individuals. For these gifts to be exempt they must also be made out of surplus income rather than capital and the individual must be able to maintain their standard of living on their remaining income.
| Tax Tip |
|---|
|
This exemption could apply in a number of circumstances e.g. payment of a grandchild’s school fees or payment of a certain percentage of income each year to children. This can be a tax efficient way to pass on wealth rather than accumulating income; please get in touch if you would like to discuss options. |
Use available reliefs
Important reliefs of up to 100% are available on business assets such as shares in a family trading company or on agricultural property. It is important that these reliefs are utilised because once the asset concerned is sold the relief will be lost. They can only be used in connection with transfers that are chargeable to IHT.
Other lifetime exemptions
Other exemptions may also apply to lifetime gifts:
- small gifts not exceeding £250 in total per donee per tax year
- gifts made in consideration of marriage up to £5,000 if made by a parent, £2,500 by grandparents and £1,000 by others
- gifts between spouses are exempt from IHT (note this also applies to spousal transfers in the death estate)
| Tax Tip |
|---|
|
Do not waste your exemptions. Regularly using IHT exemptions will build up funds outside of the estate without incurring an IHT liability. |
| Word of caution |
|---|
|
The small gifts exemption limit of £250 applies to the total per donee per tax year not to each gift. If gifts to a donee total more than £250 in a tax year the total amount is no longer exempt. |
Charitable giving
Gifts to charity are exempt from IHT whether made during lifetime or on death.
In addition, a special relief means the legacies may result in a lower IHT liability on the estate which remains chargeable. A reduced rate of IHT applies where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the 40% rate will be reduced to 36%.
| Practical Tip |
|---|
|
Instead of giving a specific amount of money to a charity is possible to draft your will in such that the donation is set at an amount equal to that needed to benefit from the lower rate of IHT. |
Business and agricultural property
Important reliefs of up to 100% are available on business assets such as shares in a family trading company or on agricultural property. These reliefs apply to gifts made both in lifetime and on death.
The rules concerning these relief are complex and various conditions must be met to qualify for relief but we can help you to make best use of available reliefs.
Residence nil rate band (RNRB)
An additional nil rate band, the RNRB, may be available where a residence is passed on death to direct descendants such as a child or a grandchild. The RNRB is £175,000 in 2025/26 and is frozen until April 2030. The RNRB can only be used in respect of one residential property which has, at some point, been a residence of the deceased.
The RNRB is also available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.
There is a tapered withdrawal of the RNRB for estates with a net value (after deducting any liabilities but before reliefs and exemptions) of more than £2 million. The withdrawal rate is £1 for every £2 over this threshold.
Taper relief
Where an individual does not survive seven years from the date of a gift, a PET becomes chargeable and additional tax may be payable on a CLT.
However, the amount of the IHT charge is reduced where an individual survives at least three years from the date of the gift. The amount of reduction depends on the length of time between the gift and death; the IHT liability is reduced by 20% if the individual survives three but not four years, increasing to an 80% reduction if the individual survives six but not seven years.
IHT planning
Lifetime transfers
If possible you should make absolute gifts in your lifetime. Benefits of this may include:
- Use of the annual and other lifetime exemptions.
- If you survive seven years then a PET becomes completely exempt and no further tax is due on a CLT.
- If you do not survive seven years but you do survive three years then taper relief may reduce the IHT liability.
| Word of caution |
|---|
|
You cannot continue to benefit in any way from the asset gifted because this will render the gift ineffective for IHT purposes. You cannot, for example, give away your home to your children but continue to live in it rent free. |
IHT for spouses
Each spouse/civil partner has their own NRB and annual exemptions. In addition gifts between spouses are typically exempt from IHT whether in lifetime or on death.
| Tax Tip |
|---|
|
Equalising assets between spouses may have benefits both from an income tax perspective (see Family matters) and for the purposes of IHT planning. It may be beneficial to make use of the spousal exemption to broadly equalise estates so that both partners can make full use of exemptions and the NRB. |
There may also be benefits to being married or in a civil partnership where it is not possible to use the full NRB on the death of the first spouse e.g. because they wish to leave sufficient assets to their surviving spouse to maintain their standard of living. If the NRB is not fully used on the death of the first spouse it may be proportionately transferred to the estate of the surviving spouse.
It is also possible to transfer the RNRB to the surviving spouse.
| Example |
|---|
|
Tom died leaving the whole of his estate of £800,000 to his wife Pru. A few years later Pru died leaving her whole estate of £1,100,000 to her children including the family home worth £600,000. |
|
As Tom’s estate was left to Pru, 100% of his NRB and RNRB is available. This is in addition to Pru’s own NRB and RNRB. Therefore IHT on Pru’s death would be calculated on just £100,000 (£1,100,000 – [£325,000 x 2] – [£175,000 x 2]). |
Use life assurance
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities. A policy can be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised like family company shares.
We can help
Contact us if you:
- Own assets with a value exceeding £325,000
- Wish to pass on wealth in a tax efficient way
- Already have a trust or want to set one up
- Have surplus annual income
- Have your own business, shares in an unlisted company or a controlling shareholding in a listed company
- Own agricultural property either used by yourself or let out
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
