New Labour Chancellor Rachel Reeves is rumoured to be considering changing inheritance tax (IHT) rules – including introducing a higher rate, or potentially scrapping IHT relief altogether.
IHT is a big source of revenue for the Treasury – it raked in £7.5bn in the financial year to the end of March 2024. Higher taxes or scrapping IHT relief will certainly help Labour commit to the spending pledges in their manifesto.
There’s no guarantee rules will change, and Labour didn’t mention IHT much in the 2024 General Election, but they also didn’t rule anything out.
Whatever happens between now and the autumn Budget, it’s worth getting the basics in place first and asking yourself:
Will I be affected by inheritance tax at all?
Who do I want to benefit from my assets and when?
How much can I afford to gift, bearing in mind future expenses like care costs or rising living costs?
Do I have an up-to-date and valid Will?
Have I registered a Lasting Power of Attorney?
Have I discussed my plans with my family and solicitor?
If you haven’t thought about any of these questions yet, it’s never too soon – or too late – to start.
This article isn’t personal advice. Inheritance tax can be complicated, if you’re not sure of a course of action, you should ask for financial advice. We can advise you on how to make use of tax allowances, but if you need complex tax calculations, we recommend consulting an accountant or tax specialist.
Tax rules can change, and any benefits depend on personal circumstances.
What are the current rules and who has to pay IHT?
Not everyone has to pay inheritance tax. Here are the current rules.
IHT is usually paid at 40% on the value of your estate (your property, money and possessions) over the £325,000 allowance (the normal nil rate band).
There’s also an additional allowance of up to £175,000 if you pass on your family home to children or grandchildren.
And, for any joint assets, you only include the value of your share.
If you’re married or in a civil partnership, you can combine your allowances and transfer assets between each other free of IHT.
When one dies, the surviving spouse won't have any IHT liability, and you might be able to make use of the IHT allowances which were unused by your late spouse/partner.
See whether you could be impacted by inheritance tax by using our IHT calculator.
5 tips to cut your IHT bill
Make a Will
One of the biggest factors in deciding the size of your IHT bill can be who will benefit from your estate.
A professionally drafted Will is the cornerstone of making life easier for those you leave behind and could save tax.
Plus, a Will avoids your beneficiaries having to deal with the awkward rules of intestacy.
Use your gifting allowances
Each tax year you can give away up to £3,000 IHT free. But there are lesser-known gift allowances that you can use too.
For example, you can give away up to £5,000 when a child gets married (£2,500 for each grandchild), or the unlimited gifts you can make from surplus income – these shouldn’t impact your quality of life.
Using your annual gifting allowances can reduce tax liabilities.
Make use of your pension
Normally, pensions fall outside of the estate for tax purposes. You can name as many beneficiaries as you like and in most circumstances there’s no IHT for them to pay.
And if you die before you’re 75, your beneficiaries' can usually withdraw what they like from any remaining pension pots without paying any tax at all. If you’re over 75, any withdrawals will be taxed at the beneficiaries marginal rate of income tax.
Gift to registered charities
Not only will you be helping a good cause, giving to charities can reduce your tax liability.
Charitable gifts are completely IHT free. And if 10% of your taxable estate is left to registered charities, it can reduce the IHT charge on the rest of your estate to 36%.
Invest in companies that qualify for business relief (BR)
Investing in certain companies can mean you qualify for 100% relief from IHT, so there’s no IHT to pay.
This is provided they’re held for a minimum of two years, they’re still held at death, and the shares still qualify when the holder passes away.
If the shares haven’t been held for two years, a surviving spouse or civil partner can inherit the portfolio without restarting the holding period.
Remember, all investments can go down as well as up in value and you could get back less than you invest. However, you have a greater chance of getting back less than you put in with companies eligible for BR as they’re generally riskier and more volatile than larger, more established companies.
Find out how gifting, investments and trusts could mean less inheritance tax to pay.
Could our advisers help you with IHT planning?
Our financial advisers are experts at helping clients organise their estates to keep more money for loved ones and less for taxes. They stay up to date with the latest rules as they’re announced so you can navigate complex regulations with confidence.
A call with our advisory team is the first important step towards getting IHT advice. It will help you:
Discover if advice is right for you
Understand the benefits and cost
Decide which of our advisory services might suit you best
You won't get personal advice on the call and there’s no pressure to take advice. Only if it’s right for you, will we book your free initial consultation with one of our Financial Advisers.