Inheritance Tax: 5 things you need to know

Leaving a good inheritance can be life-changing for your loved ones. And having a plan in place will help reduce the chances of leaving them with an unwelcome tax surprise too. Knowing what Inheritance Tax (IHT) is and how it works means you can reduce it – or even avoid it altogether.


  • If you’ve spent your working life building up your assets, you’ll want to protect them for the benefit of future generations.
  • You can reduce the amount of Inheritance Tax (IHT) payable with careful estate planning and tax-efficient gifting.
  • Starting the conversation now means you can feel part of your family’s future, even when you’re gone.
  • Your financial adviser can help you and your family understand the ins and outs of Inheritance Tax.

We all want our hard-earned savings and assets to pass to our nearest and dearest when we die. Indeed, recent research published by The Wisdom Council on behalf of St. James’s Place revealed more than two-thirds (69%) of clients expect to provide some form of financial support for their family at some point.1 And more than one-third of those people expected that support to be in the form of an inheritance.

Many of us know the impact a lump sum inheritance can have – whether it’s helped you become mortgage-free, send your children to a good university or achieve another long-term life goal. But when it comes to passing your own money on to your children and grandchildren, it can be hard to accept the uncomfortable reality that your estate could be liable to Inheritance Tax.

If you want your loved ones to keep more of your estate when you die, there are some simple steps you can take to mitigate your IHT liability.

When do you have to pay IHT?

The basic rule of thumb for how much you owe is that the first £325,000 of your estate is tax-free – known as the nil rate band. In addition, where your home is inherited by your direct descendants, a further amount of up to £175,000 can be left tax-free – this is known as the residence nil rate band (covered in more detail below). Then, subject to other available allowances, any assets – including property, money, valuable art or jewellery – will potentially be liable to 40% IHT.

But with meticulous planning in place, it’s entirely possible to mitigate and minimise much of the IHT you would otherwise pay. This way, you ensure full use of exemptions, gifting and other tax-efficient investments.

To help you start planning ahead, our essential IHT guide covers the top five things to know about this tax – and how to avoid it.

1. Preparation is key

IHT is a highly complex area, and knowing when to start planning is key. This is usually when your savings and assets begin to accumulate – for example, when your day-to-day expenses go down, such as when children leave home or your mortgage repayments are almost finished.

It’s also important to regularly review your Will*, as who you leave money to will affect whether inheritance tax is payable (more on that in tip #2!). The larger the family, the more complex the financial planning and decisions become. Start talking to your family about your plans and be clear about your wishes.

Conversations about inheritances and gifts can become emotionally charged – but having them now can often make winding up the estate a little easier after you’ve gone. This is an area where you can really benefit from the insight, knowledge and experience of a professional financial adviser.


2. Brush up on the rules

Gaining a better understanding of how the IHT thresholds work can easily minimise a big chunk of your projected IHT bill.

  • The first £325,000 – known as the nil-rate band – is tax-free. You can transfer this over to a spouse or civil partner by leaving all your assets to them, so that when they die, the first £650,000 of their estate will be tax-free.
  • If you leave everything to your spouse, civil partner, a charity or a community amateur sports club, there’s no IHT liability on your death.
  • Your tax-free threshold increases by up to £175,000 to £500,000 if you leave your home to your direct descendants (e.g. children, stepchildren, or grandchildren), subject to your estate being less than £2m. Definitely take financial advice if you are thinking about doing this, though.
  • If you give away 10% or more of the net value of your estate to charity, you may only have to pay a reduced IHT rate of 36% on certain assets.

3. Using pensions to help IHT planning

Pensions are one of the most tax-efficient ways to pass on your wealth. Most Defined Contribution pension schemes will fall outside of your estate. It may be that you have different pension pots and that you choose to pass one or more to your children or grandchildren.

Should you die before the age of 75, your pension pot can be paid as a lump sum – or income to any beneficiary – tax-free. From 75 onwards, beneficiaries must pay tax at their marginal rate on withdrawals.

4. Gifting can mitigate IHT and help support your family now

One of the easiest, not to mention potentially the most rewarding, ways to prevent HRMC pocketing your wealth is to give some of it away during your lifetime.

  • By using your annual gifting exemption, you can give away up to £3,000 each tax year IHT exempt, as well as making any number of small gifts up to £250 per person.
  • You can also make use of any unused gifting allowance from the previous tax year. So, a couple could potentially remove £12,000 from their joint estate.
  • Parents can give £5,000 to each of their children as a wedding gift and grandparents can give £2,500. It is also possible to make a wedding gift of £1,000 to any other person – a niece or nephew, for example.
  • The gifted money could be invested on behalf of a child or grandchild. For instance, you could contribute towards a child’s Junior ISA, which could give them a head start and get them into the savings habit.
  • Gifts made from your regular income are tax free, so long as you can prove that they don’t affect your own standard of living.
  • Gifts above the £3,000 allowance are generally exempt from IHT so long as you survive for seven years after making the gift. Gifts above the nil rate band, made between three and seven years before your death are taxed on a sliding scale – known as ‘taper relief’. The longer you live, the less you pay.

5. Making the most of Trusts

Trusts are a tried and tested tool in IHT planning, and they’re effective way to ensure the right people get the right money – at the right time. Be aware though that there are several different types of trust and there are different ways of setting them up. In some cases, you may be able to access the funds, but in others you can’t. Trusts can be complicated, so always approach your adviser before beginning the process of setting one up.

A brighter future for your family

The rules of IHT are highly convoluted, and having a plan in place means you’re less likely to make reactionary decisions, while also reducing the chances of an unwelcome tax surprise for your loved ones.

Starting the conversation around inheritances and legacy now will make sure your money lives on. If you’d like a financial adviser by your side to help start those conversations, do get in touch.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Although anyone can contribute to an ISA for a child, only the parent/legal guardian can open the ISA for them.

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place and, along with Trusts, are not regulated by the Financial Conduct Authority.

Trusts are not regulated by the Financial Conduct Authority.


1 Intergenerational Wealth Transfer Survey, carried out on behalf of St. James’s Place by The Wisdom Council, 2023, survey size 887.