Currently, a couple can pass on an estate worth up to £1 million to their heirs without incurring IHT. This threshold includes the individual nil rate band of £325,000 each and the additional main residence allowance of £175,000 each.

Although most people will not face an IHT charge, the proportion of estates affected is expected to rise. The government has indicated that the IHT threshold will remain unchanged until at least 2030, and increasing asset prices could push more families into the IHT bracket.

Property, being a major component of many estates, poses a particular challenge due to its illiquid nature.

Estates that narrowly exceed the IHT threshold often face unexpected tax bills for their heirs. In the 2017/2018 tax year, the average IHT liability was approximately £197,000. However, with effective planning, it is possible to minimise or even eliminate potential IHT liabilities.

Here are some popular strategies for IHT planning.

Gifting.

Gifting assets is a straightforward method for reducing your estate's value. Gifts are categorised as either tax-free immediately or those that fall outside your estate after a period, usually seven years. A once popular strategy was to gift assets into a trust, though it is essential to seek legal advice on trust structures..

Insurance.

Life insurance can be used to cover potential IHT bills. By setting up a policy that pays out an amount equivalent to your estimated IHT liability, you can provide funds for your heirs without increasing the IHT burden. Ensure the policy is written into trust to avoid IHT on the payout.

Business Relief.

Shares listed on the Alternative Investment Market (AIM) and private equity can qualify for Business Relief (BR), potentially exempting them from IHT. These shares must be held for at least two years before death to qualify.

During the Autumn Budget of 2024, the government announced that AIM shares will now be subject to an effective inheritance tax (IHT) rate of 20% after the two year holding period. This decision retains certain tax benefits for the junior market rather than eliminating them completely, with the changes set to take effect in April 2026.

For non-AIM shares, the Chancellor confirmed that Business Relief (BR) will remain IHT-free up to £1 million after the two-year holding period.  This is good news for portfolios £1m and less.  For amounts over this threshold, an effective IHT rate of 20% will apply.

Professional advice is recommended due to the complexity and potential changes in regulations.

Pensions.

Until recently, pensions were excluded from an individual’s estate for inheritance tax (IHT) purposes. However, during the Autumn Budget of 2024, the government announced plans to integrate pensions into the IHT framework, effective from April 2027. A consultation period is currently underway and will remain open until 22 January 2025. This timeline provides opportunity for individuals to reassess their financial strategies and plan accordingly before the changes take effect.   

Inheritance Tax planning can be complex and demands careful consideration. The strategies mentioned above are some of the most effective approaches. Consulting with a financial adviser can be especially beneficial for a variety of reasons, including saving time, navigating complex investment scenarios, and receiving ongoing, personalised guidance.

It is important to be aware of the following risks: The Financial Conduct Authority (FCA) does not regulate some aspects of Trust, Tax and Estate Planning.