Private client & estate planning solicitors in Liverpool

Inheritance tax isn’t payable when you pass your estate to a husband, wife or civil partner, or to charity, when you die. Otherwise, IHT is only payable when your estate (including the value of your undrawn pension) is worth more than £325,000. There is an additional allowance of up to £175,000 if you leave your home to your children or grandchildren (if you have them). The allowances can be transferred between spouses and civil partners. This means that on the death of the second partner there could be a total tax-free allowance of £1m. The standard IHT rate is 40% and only charged on the part of your estate that’s above the combined allowances.

Planning for inheritance tax can involve several strategies to legally minimise the amount of tax due on your estate, including having an up-to-date Will, making use of allowances and exemptions, lifetime gifting and trusts. The specifics of IHT can be complex, and vary depending on personal circumstances, so it’s strongly advisable to seek professional advice.

If you die before 6 April 2027, your pension can pass IHT-free to your nominated beneficiaries, although other taxes may be due on withdrawals if you're 75 or over when you die.

If you die on or after 6 April 2027, IHT will be due on the value of your pension. This may affect your qualification for the Residence Nil Rate Band, depending on the figure involved.

Thanks to Business Relief, inheritance tax on business assets is currently payable at 0%. However, from 6 April 2026 the rate will be 20% above a tax-free threshold of £1m. 

The business must be a trading business, not an investment company. A similar relief called Agricultural Relief can apply to farm property. 

It’s important to plan ahead to ensure that your business assets qualify for business relief and the relief isn’t wasted when considering business succession. It's important that business owners proactively plan for succession of the business, as many would struggle to find the IHT due on their business interests on death and this could impact the viability of the business.

While you’re able to gift all or part of your home to your children, there are some risks that you should bear in mind.

Gifting your property to your children means that you’re in effect relinquishing legal ownership. This can put you in a vulnerable position — particularly if you intend to stay at the property — if your children decide to exercise their legal right to sell the property and evict you. 

If your child is bankrupt or going through a divorce, the property may be used as part of a settlement or to pay off debts.

Additionally, if you gift all or part of your home but continue to live in it, this may fall within the ‘Gift with a Reservation of Benefit’ (GROB) regime, which can have serious tax consequences on your death.

The Residence Nil Rate Band is an additional inheritance tax-free allowance of up to £175,000 introduced in 2017. It applies to estates where the death occurred after 6 April 2017 and the deceased owned an interest in a property that’s ‘closely inherited’ by a lineal descendant. 

The definition of a lineal descendant includes children, grandchildren, great-grandchildren, a spouse of a lineal descendant and step children. The definition doesn’t include other descendants such as nieces and nephews or the children of an unmarried cohabitee.

There’s no limit on the amount that you can gift to others during your lifetime. However, it should be borne in mind that a person’s available nil rate band of £325,000 will be used up by any such gift. Therefore, if you make a gift of £1m and die within seven years of making that gift, £675,000 will be liable to IHT at 40% and will be payable by the recipient of the gift. This rate will be ‘tapered’ if you survive for more than three years. 

Generally, when assessing your IHT exposure after you’ve died, your executors will look at all the gifts you’ve made in the seven years prior to your death.

Lifetime gifts to individuals are treated as potentially exempt transfers (PETs), which means that there’s no immediate charge to inheritance tax when the gift is made. 

PETs are ‘potentially’ exempt because if the donor (the person making the gift or deemed to be making the gift) survives for seven years from the date of the gift, the gift becomes fully exempt from IHT. 

If the donor fails to survive for seven years, the gift becomes chargeable and will use up (all or part of) the donor's nil rate band (currently £325,000 or up to £650,000 if they’re a surviving spouse or civil partner). 

For any amount over the nil rate band, the longer the donor survives after making the gift (subject to surviving at least three years), the lower the IHT. This relief is called ‘taper relief’. 

It should be noted (and this is commonly misunderstood) that taper relief only reduces the amount of tax payable on a failed PET. It doesn’t reduce the ‘value’ of the PET itself.

If the value of an estate exceeds £2m, a taper is applied and the relief is reduced by £1 for every £2 that the value exceeds £2m. So, by the time a person’s individual estate exceeds £2.35m, there’ll be no RNRB left to apply. 

Married couples whose combined estates exceed £2m but whose individual estates don’t exceed £2m may be able to take steps to ensure that one RNRB can be claimed on the first spouse’s death, which could provide a tax saving of up to £70,000. 

When someone dies and leaves everything to their spouse, the value of their estate is exempt from inheritance tax because of the spousal exemption, so their Residence Nil Rate Band goes unused. 

Much like the main nil rate band, the executors of widows and widowers can claim any unused RNRB from their deceased spouse or civil partner, even if the first death occurred prior to 6 April 2017. It’s important to note that the RNRB can only be transferred between spouses and civil partners, not cohabitees. 

Where a property has been sold prior to someone’s death and either a new property hasn’t been purchased because they have moved into permanent residential care or a smaller, less valuable property has been purchased in its place, it may be possible to claim a downsizing addition to make up for the amount of Residence Nil Rate Band that has been lost.

The downsizing addition is available where:

• the person sold, gave away or downsized to a less valuable home on or after 8 July 2015
• the former home would have qualified for the RNRB if the person had kept it until they died
• the person’s direct descendants inherit at least some of the estate.