Understanding UK Inheritance Tax (IHT)

Strategic Guidance to Protect Your Wealth Across Generations

What Is Inheritance Tax and When Does It Apply?

Inheritance Tax is a tax on the value of an individual’s estate when they pass away. This includes all property, cash, investments, possessions, and other assets owned at the date of death. In some cases, IHT can also apply to certain gifts made during a person’s lifetime if they fall within specific time windows.

For most estates, the standard IHT rate is 40% on the value above the available tax-free allowances. However, effective planning, using exemptions, reliefs, trusts, and other strategies, can significantly reduce or eliminate this liability.

Key Inheritance Tax Thresholds and Exemptions

Every estate benefits from a standard nil-rate band, currently set at £325,000. Any value above this is typically subject to IHT at 40%. However, a number of key exemptions and additional allowances may increase this tax-free threshold:

• The Residence Nil-Rate Band (RNRB) allows an additional £175,000 when a main residence is passed to direct descendants (such as children or grandchildren). This means a married couple could pass on up to £1 million tax-free under the right circumstances.

• Spouse or civil partner exemption: Assets left to a spouse or civil partner are exempt from IHT entirely. Moreover, any unused allowances can be transferred to the surviving partner, effectively doubling the IHT threshold for the family unit.

• Charitable legacies: Leaving 10% or more of your estate to charity reduces the IHT rate on the rest of your taxable estate from 40% to 36%.

It's important to note that the RNRB begins to taper for estates valued over £2 million, meaning large estates may not benefit from the full additional allowance.

Recent and Upcoming Changes to IHT

Inheritance Tax is an area subject to regular reform and scrutiny, particularly where international tax treatment and pension wealth are concerned.

Since 6 April 2025, UK tax residence has replaced domicile as the test for Inheritance Tax on worldwide assets. Someone who has been UK resident for at least 10 of the previous 20 tax years is a long-term UK resident, and their assets anywhere in the world are in scope. After leaving the UK, they stay in scope for between 3 and 10 tax years, depending on how long they lived here. This has significant implications for internationally mobile individuals and their estates.

From 6 April 2027, most unused pension funds and death benefits will count as part of the estate for deaths on or after that date, and the personal representatives will report and pay any IHT due on them. Death-in-service lump sums from registered pension schemes stay outside IHT. Until then, pensions held outside the estate are typically exempt, which makes early planning and beneficiary nominations even more important.

How P10 Financial Supports Clients With IHT Planning

Inheritance Tax planning is not about avoiding your obligations, it’s about ensuring that your estate is structured fairly, efficiently, and in line with your wishes. We work with individuals, families, and business owners to preserve wealth, support intergenerational gifting, and reduce unnecessary tax exposure. Here is an example of when our team saved a family INHERITANCE TAX STRATEGY SHIELDS FAMILY LEGACY AND SAVES £800,000.

Our estate planning services include:

• Reviewing your estate and calculating your potential IHT liability

• Structuring gifts and asset transfers during your lifetime

• Advising on the use of trusts to ring-fence wealth for future generations

• Ensuring correct use of allowances, including the nil-rate band and RNRB

• Implementing life insurance policies held in trust to cover future tax bills

• Advising business owners on Business Relief and Agricultural Relief eligibility

• Reviewing pension nominations and ensuring beneficiary structures are tax efficient

Common Strategies to Reduce Inheritance Tax

While each estate is unique, there are several established planning routes we may explore as part of a personalised solution:

Lifetime Gifting: Making gifts during your lifetime, especially if you survive seven years after the gift is made, can remove value from your estate entirely. There are also annual gift exemptions (£3,000 per year, plus carry-forward rules) and allowances for small gifts and wedding gifts.

Trusts: Trusts can be used to move assets out of your estate while still allowing you to retain some control over how they are used. This is particularly useful for protecting wealth for children, grandchildren, or vulnerable beneficiaries.

Business and Agricultural Reliefs: If you own a trading business or qualifying farmland, these assets may qualify for relief. Since 6 April 2026, 100% relief applies to the first £2.5 million of qualifying business and agricultural property combined, and 50% relief to the value above it; a surviving spouse or civil partner can use any allowance their partner didn’t. Shares on markets such as AIM get 50% relief.

Charitable Giving: Philanthropy can play a meaningful role in tax-efficient estate planning. Leaving gifts to registered charities can reduce, or even eliminate, IHT liability on the rest of your estate.

Insurance-Based Planning: A life insurance policy, held in trust, can be an effective way to cover a future IHT bill. This prevents the payout from increasing the size of your estate and provides liquidity for your heirs when it’s needed most.

Pension Planning: Ensuring your pension assets are structured to pass tax-efficiently to your chosen beneficiaries will become increasingly important as future reforms come into effect.

Why IHT Planning Requires Professional Guidance

Inheritance Tax planning is highly personal and often involves balancing financial, legal, and emotional considerations. What works for one family may not be appropriate for another, and poorly executed plans can result in unnecessary tax, delays, or disputes.

At P10 Financial, our advisory approach is collaborative and forward-thinking. We work closely with accountants, legal professionals, and financial planners to ensure your estate strategy reflects your values, goals, and family circumstances,  now and into the future.