Inheritance tax (IHT) is one of the most complex areas of financial planning and one that often creates uncertainty for families. As asset values rise and future reforms come into force, understanding how IHT works, and where planning commonly falls short, plays a key role in protecting wealth across generations.
With the right structure and advice, many estates can reduce unnecessary tax exposure and create greater certainty for loved ones.
Understanding allowances and how they work together
Every individual currently has a nil rate band of £325,000. Assets within this threshold can usually pass free of inheritance tax, with amounts above it taxed at 40%.
In addition, a residence nil rate band of up to £175,000 may apply when a main residence is passed to direct descendants, such as children or grandchildren. Where allowances are unused, married couples and civil partners can often transfer them to one another, creating a combined potential allowance of up to £1 million in certain circumstances.
How assets are owned and who they are left to directly affects how these allowances apply. Reviewing wills and ownership arrangements helps ensure these reliefs are used effectively rather than lost.
Gifting as part of long-term planning
Gifting during your lifetime can reduce the value of an estate, but it works best when the rules are clearly understood and applied deliberately.
Some gifts fall immediately outside the estate, including the annual £3,000 gifting allowance and gifts made on marriage or civil partnership within set limits. Larger gifts typically fall under the seven-year rule, meaning their tax treatment depends on how long the individual lives after making the gift.
Regular gifts from surplus income can also be effective when properly structured and documented, provided they do not affect day-to-day living costs. Keeping clear records is essential to demonstrate intent and affordability.
Pensions and inheritance tax planning
Pensions have historically sat outside the inheritance tax framework, making them a valuable planning tool. From April 2027, most unused pension funds and death benefits are expected to form part of an individual’s estate for IHT purposes.
This does not require immediate action, but it does mean pensions should now be considered alongside property, savings and investments when reviewing estate planning. Beneficiary nominations and drawdown strategies deserve particular attention in light of these changes.
Planning for liquidity
Inheritance tax is typically payable within six months of death. Estates that are asset-rich but cash-poor can face practical challenges when settling a tax bill.
Life assurance written into trust is one option families use to create liquidity without forcing the sale of property or business interests. Whether this is appropriate depends on personal circumstances and wider planning objectives.
A joined-up approach
Inheritance tax planning works best when viewed as part of a broader financial picture. Assets, pensions, family intentions and future reforms all interact. Reviewing plans regularly helps ensure they remain aligned with both legislation and personal goals.
Speak to Appletree
Inheritance tax planning is rarely straightforward, and the upcoming changes add another layer of complexity. At Appletree, we help clients understand how the rules apply to their individual circumstances and build clear, structured plans that support long-term family outcomes.
If you would like to review your estate planning or understand how future inheritance tax changes may affect you, speak to the Appletree team. A conversation now can provide clarity, confidence and control over decisions that matter.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
For specialist tax advice, please refer to an accountant or tax specialist.
Approved by The Openwork Partnership on 18/02/26
