Inheritance Tax Planning – A solicitors guide and advice

Inheritance Tax planning is a crucial part of preparing for the future and protecting your family’s financial security. As Wills and Life Planning Solicitors, we understand the complexities of the law in England and Wales and how proper planning can significantly reduce the burden of Inheritance Tax on your estate.

Whether you’re drafting a Will, setting up a Trust, or transferring assets, Inheritance Tax planning can make a significant difference. In this guide, we share legal context, actionable steps, and expert advice to help individuals and families prepare wisely.

Understanding Inheritance Tax in England and Wales

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions, and money. As of the 2025 threshold, the standard rate is 40%, but this only applies to amounts above the £325,000 nil-rate band. With the right strategies, you can mitigate or even eliminate this tax liability.

Key facts about Inheritance Tax:

• Nil-rate band: £325,000 per person.
• Residence nil-rate band (RNRB): An additional £175,000 may apply if the main residence is passed to direct descendants.
• Spouse and civil partner exemption: Transfers between spouses are typically tax-free.

Why Inheritance Tax planning matters

Without a structured Inheritance Tax planning strategy, your estate may face significant tax liabilities. Engaging with experienced solicitors ensures you’re compliant with legislation while making the most of available reliefs and exemptions.

Impacts of poor planning:

1. Unintended tax bills for heirs.
2. Forced sale of family assets to meet tax obligations.
3. Loss of available exemptions and reliefs.

Essential Inheritance Tax planning tools

There are several mechanisms solicitors can use to minimise or eliminate IHT exposure. These include:

1. Wills and testamentary planning

Creating a Will allows you to structure your estate efficiently. A solicitor can ensure the Will reflects your wishes while using tax-saving tools like Discretionary Trusts or charitable bequests.

2. Lifetime gifts

You can make gifts during your lifetime to reduce your taxable estate. These include:

• Annual exemption: Up to £3,000 per year.
• Small gifts exemption: Up to £250 per person per year.
• Potentially exempt transfers (PETs): Gifts that become tax-free if you survive seven years.

3. Trusts

Trusts are useful for transferring wealth while retaining control over how it is used. Trusts like the interest in possession trust or Discretionary Trust can reduce IHT liability while ensuring beneficiaries are supported. Learn more from the UK Government’s guide on trusts and taxes.

4. Family Investment Company (FICs)

Fast becoming a popular alternative to Trusts, FICs are private limited companies specifically incorporated for the purpose of wealth and succession planning. The key advantage being that the “founder” (individual or married couple/civil partners) can pass their wealth to the next generation whilst retaining a significant level of control.

5. Business Relief and agricultural relief

These allow business or agricultural property to be passed on with up to 100% relief from IHT if certain conditions are met.

6. Life Insurance and whole of life policies

Taking out a life insurance policy written in trust can help provide funds to pay IHT without adding to the taxable estate.

Case example

Mr and Mrs Thompson owned a property worth £800,000 and savings of £200,000. They had two adult children. Without planning, their estate faced an IHT bill of over £200,000. Working with solicitors, they:

• Updated their Wills to use both nil-rate and residence nil-rate bands.
• Created a Discretionary Trust to protect family wealth.
• Made annual gifts to reduce the estate value.

As a result, their IHT liability was reduced by more than 50%.

Expert insights from our solicitors

Our experienced team offers the following advice:

• Start early – the sooner you begin Inheritance Tax planning, the more options are available.
• Keep records of all gifts made.
• Review your Will regularly to reflect life changes (marriage, divorce, births).
• Use Trusts strategically for complex family or financial arrangements.

Our Wills and Life Planning team of experienced experts are happy to talk through with you the potential tax implications relating to your situation – helping you understand any reliefs and exemptions and contacting HMRC if you are an executor of an estate. Our overall aim is to put you in a position where you understand the Inheritance Tax legislation and can reduce your estate’s liability to pay this.

Contact us for more information.

Benefits and challenges of Inheritance Tax planning

Benefits:

• Protects family wealth.
• Ensures a smoother probate process.
• Optimises use of allowances and reliefs.

Challenges:

• Complex rules and legislative changes.
• Potential for disputes if planning is unclear or unequal.
• Need for periodic reviews and updates.

FAQs

What is Inheritance Tax planning?

Inheritance Tax planning is the process of legally minimising the Inheritance Tax liability on your estate using tools like wills, gifts, and trusts, tailored to the laws of England and Wales.

What is the 7-year rule in Inheritance Tax planning?

If you give assets away and survive for 7 years, they are generally not counted towards your estate for IHT purposes. This is known as a potentially exempt transfer (PET).

How can trusts help reduce Inheritance Tax?

Trusts can hold assets outside of your taxable estate, helping reduce IHT while still providing for family members. Different trust types offer varied benefits.

Can Inheritance Tax planning benefit small estates?

Yes, even smaller estates can benefit by maximising allowances like the nil-rate band and residence nil-rate band, or avoiding future growth that would push them over thresholds.

Table: Key Allowances and Exemptions

This article was produced on the 25th July 2025 for information purposes only and should not be construed or relied upon as specific legal advice.