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Your estate planning options

24 Mar 2021 Reading time: 5 mins

How to plan for inheritance tax

Inheritance tax is a tax on the value of everything you leave behind when you die. Not everyone is required to pay inheritance tax. You can leave any amount to your spouse or civil partner. But if the amount you leave to others is valued above £325,000, the excess is taxed at 40% when you die. This is known as the ‘nil-rate band’.

There’s also an additional inheritance tax allowance of £175,000 available. This is called the ‘residence nil-rate band’ and it can be applied to the main family home. There are other rules that apply to whether or not this allowance can be claimed, so it’s best to speak to your financial adviser about your individual situation.  

With rising house prices and investment values, nowadays leaving an inheritance tax bill behind isn’t just a concern for the very wealthy. And if your estate does have an inheritance tax liability, it’s your loved ones that have to pay the bill. 

So, understandably, some families want to plan for inheritance tax. Let’s look at a few options here.


One route available to individuals worried about leaving behind an inheritance tax liability is to gift assets away during their lifetime. This can be an attractive option if you want to see loved ones benefit from your wealth whilst you are alive.

Gifting is a straightforward concept in principle, but the rules around making a gift can be rather complex.

Some very small gifts are inheritance tax-free, for example you can gift £3,000 in total each year. But larger gifts typically take seven years to become completely free from inheritance tax (known as potentially exempt transfers, or “PETs”). So, if you die within seven years of making large gifts, they are unlikely to have been effective in reducing the inheritance tax bill due on your estate.

And it’s worth being aware that when making gifts, changing your mind can be difficult. Anyone making a gift loses ownership and control of that wealth as soon as the gift is made. 

Trust planning

When you put money or property in a trust, that wealth is no longer in your name. In other words, you no longer own the assets. Therefore, like making gifts, you lose access to wealth that is put into trust.  It also typically takes seven years for assets to become completely free from inheritance tax from the point they are settled into trust, and incremental tax charges can be due along the way. 

However, one benefit of trusts is that they can enable you to retain some control over what happens to the assets in the trust. They can be used to ensure wealth is kept in the family over generations.

There are different types of trusts available to meet different needs. For example:

  • If you want to leave assets to children or grandchildren, but you don’t want them to have access to the assets until they reach a certain age.
  • If you want to make sure that wealth doesn’t leave the family through divorce.
  • If you want someone to receive an income from your assets during their life, but ultimately want the assets to be passed to someone else.

Business Relief

Business Relief (BR) could be worth considering if you are reluctant to lose access to your wealth and are comfortable with investment risk. It’s an investment incentive that encourages you to invest into growing companies while planning for inheritance tax.

Shares in companies that qualify for BR can be passed on free from inheritance tax if they’ve been held for at least two years and at the time you die. BR can be an attractive way to reduce an inheritance tax liability as it offers faster inheritance tax exemption than putting assets in trusts or making a gift. 

Plus, you retain access to your wealth because it’s an investment that remains in your name. In theory you can request a withdrawal at any time, but access can’t be guaranteed. Remember that any money withdrawn would become liable for inheritance tax if not spent.

Investing in BR-qualifying businesses isn’t for everyone. The value of an investment, and any income from it, can fall as well as rise. You may get back less than you invest. The shares of qualifying companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell. The tax relief helps to compensate for some of this risk.

Current tax legislation could change, and tax relief depends on the companies maintaining their BR-qualifying status. HMRC will only conduct a BR assessment after the death of an investor, to confirm whether the companies invested in qualify for BR at that time. Tax treatment also depends on individual circumstances.

We’ve made a short video to explain BR. Watch it here.

Life insurance

Taking out insurance doesn’t reduce the amount of inheritance tax due on an estate, it is a way to pay a potential inheritance tax bill.

Insurance policies are designed to pay out a lump sum when you die. There are two types of policies that can help with inheritance tax: whole-of-life assurance and term insurance. Life assurance pays out when you die, providing you have kept up policy payments until that date, no matter when the death occurs. Term insurance pays out if you die within a certain period. You should also bear in mind that the process of applying for life insurance often requires medical underwriting. 

Because of the complexities involved, you should seek sound financial advice and shop around for a competitively priced policy to suit your specific needs.

Taking the next step

If you’re concerned about leaving behind an inheritance tax bill, your first step should be to review your situation and suitability with your financial adviser. If it turns out you do need to consider estate planning further, your adviser will be able to recommend a solution best suited to your needs and objectives.

To read more detail on the different estate planning options, have a read of our ‘Untangling inheritance tax’ guide and other blogs in the series Practical steps to prepare your estate for loved ones, Understanding Business Relief and Making sense of inheritance tax.

We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest.