How to protect your family from inheritance tax in the UK

Inheritance Tax (IHT) is becoming a growing concern for more families in the UK, not just the wealthy. Rising house prices, frozen tax-free thresholds, and increasingly complex tax rules mean that more estates are now facing large tax bills when a loved one passes away. This can put extra financial and emotional strain on families at an already difficult time.

The government’s financial forecaster, the Office for Budget Responsibility (OBR), predicts that this will continue to increase over the next few years. In 2024/25, they expect IHT receipts to reach £8.3 billion, and by 2029/30, this could rise to £13.9 billion. This increase is because the IHT threshold (the amount of money you can leave behind tax-free) has been frozen, while house prices and other assets are going up, meaning more families will have to pay IHT when someone passes away.

Getting professional advice from a qualified Independent Financial Adviser (IFA) or wealth manager is one of the most effective ways to protect your estate. These experts can help you understand how IHT works, create a personalised plan, and use legal strategies to reduce or even eliminate the tax your family may have to pay.

What is inheritance tax and why is it a problem now?

Inheritance Tax is charged at 40% on anything you leave behind above a certain threshold. Right now:

• The standard tax-free allowance (known as the “nil-rate band”) is £325,000.
• If you leave your main home to your children or grandchildren, you may also get a residence nil-rate band of £175,000.
• This means that a couple can potentially pass on up to £1 million without paying tax.

However, these thresholds are frozen until 2028, while property prices have continued to rise. That means more estates are going over the tax-free limit and triggering the 40% tax. View the official HMRC guidance.

Without a plan in place, your family may have to sell your home or other assets just to pay the tax bill. And because the rules are complex, many people don’t realise they have options to reduce the impact.

Start planning early

Why it helps: The sooner you begin planning, the more options you have to reduce IHT.

If you leave it too late, some strategies like gifting or placing assets in trust might not be fully effective. An IFA can help you build a step-by-step plan based on your current assets, family situation, and future goals.

Make use of gifting allowances

Why it helps: Reduces the value of your estate, which means less tax to pay.

You can give away money or assets while you’re still alive, and some of these gifts are completely tax-free:

1. Annual exemption: You can give away £3,000 each tax year without it counting towards IHT.
2. Small gifts: You can give up to £250 to any number of people each year.
3. Wedding gifts: You can give up to £5,000 to a child for their wedding, £2,500 to a grandchild, and £1,000 to anyone else.

Larger gifts are called Potentially Exempt Transfers (PETs). If you live for 7 years after giving the gift, it won’t be taxed.

Use trusts to pass on wealth

Why it helps: Moves money or assets outside your estate, reducing the amount taxed.

A trust is a legal structure that lets you set aside assets for your loved ones while keeping some control over how and when they receive them.

Some trusts are taxed at lower rates or even avoid IHT entirely, depending on how they’re set up. For example:

• Bare trusts are simple and tax-effective for gifts to children.
• Discretionary trusts offer flexibility but may have different tax rules.

Trusts are complex, so it’s important to work with a financial adviser or estate planner to make sure they’re set up correctly.

Consider life insurance to cover the tax bill

Why it helps: Ensures your family has the money to pay any IHT without needing to sell assets.

You can take out a life insurance policy that pays out enough to cover the expected tax bill. If the policy is written in trust, the payout doesn’t count as part of your estate and won’t be taxed.

This can give peace of mind that your loved ones won’t be forced to sell property or dip into savings just to pay inheritance tax.

Plan with your spouse or civil partner

Why it helps: Maximises both of your tax-free allowances.

Anything you leave to your spouse or civil partner is usually 100% tax-free. You can also pass on any unused tax-free allowance to them when you die.

With good planning, a couple can pass on up to £1 million without paying IHT. An adviser can help you structure your wills and financial arrangements to make the most of this.

What does this advice and planning achieve?

When you take action, and get the right advice, you can cut down the inheritance tax your loved ones may have to pay. It means more of your hard-earned money ends up where you want it: supporting your children, grandchildren, or others you care about.

It also means fewer unexpected costs or last-minute decisions during a difficult time. Your family won’t need to panic about selling your home or finding cash to cover a tax bill. Instead, they can focus on what matters most, remembering you and honouring your wishes.

You keep control over how your wealth is passed on, and you make sure it’s done in the most efficient way possible.

Does it matter where you live in the UK?

Yes, while Inheritance Tax (IHT) rules are the same across the UK, there are some key differences in how estates are handled in Scotland compared to England, Wales and Northern Ireland. For example, in Scotland, the law says that certain family members, like children or a spouse, have a legal right to part of your estate, no matter what your will says. This applies to money and belongings (called “moveable assets”) and is known as legal rights. Also, the process of managing someone’s estate after they pass away, called “Confirmation” in Scotland or “Probate” elsewhere, follows different rules. If you live in Scotland or own property there, it is important to work with an Independent Financial Adviser (IFA) or wealth manager based in Scotland, or someone who fully understands Scottish law. They can help make sure your plans still work the way you want them to.

Why advice matters

Inheritance Tax is complicated, and the rules can change. Everyone’s situation is different, and what works for one person might not work for another. A qualified IFA or wealth manager can explain your options in plain language, help you make informed decisions, and guide you through the paperwork.

Getting expert support for IHT and estate planning now means you’re not leaving your loved ones with avoidable stress or an unexpected tax bill. Instead, you’re giving them the gift of security, stability, and more of the wealth you worked hard to build.

If you’re not sure where to start, speaking to a professional is the best first step.

THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, TAX, OR LEGAL ADVICE.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY CHANGE. ALWAYS SEEK PROFESSIONAL ADVICE BEFORE MAKING FINANCIAL DECISIONS.

SOURCE: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/

SOURCE: https://www.gov.uk/inheritance-tax/