The number of estates faced with paying Inheritance Tax (IHT) is likely to continue to rise, as the nil-rate bands – the amount you’re permitted to inherit without paying Inheritance Tax – remain frozen until at least 2031.
The Office for Budget Responsibility (OBR) has forecast that IHT receipts will amount to £9.1 billion in 2025/2026, up from £7.5 billion in 2023/24, and in 2029/2030 this figure could reach £14.3 billion.
The Government has frozen the IHT nil rate bands until at least April 2026. By then, the main nil-rate band will have been £325,000 for more than two decades, meaning more and more people may find themselves faced with an IHT liability.
This 40% levy is charged on the value of all of your estate’s assets over the £325,000 threshold when you die, after deducting any exemptions and reliefs. The Residence Nil-rate Band – available where someone passes on their home to their children – has a £175,000 additional allowance.
Assets left to your spouse or civil partner, and those left to charity, are usually exempt, and careful financial planning can help mitigate your overall Inheritance Tax liability. The key is to start as early as possible.
1. Normal expenditure out of income
The ‘normal expenditure out of income exemption’ refers to regular financial gifting – providing conditions are met – and can save thousands in IHT. It can also be combined with some other allowances, apart from the small gifts allowance (see below).
To benefit from this specific tax relief, gifts must be:
• regular
• out of your income (including ISA income)
• not reduce your standard of living
This is one of the most generous exemptions, as taxpayers can gift any amount of money provided all three components above are satisfied. Normal expenditure out of income could be used, for example, to put into a child’s savings account, go towards university fees or help friends or relatives.
2. Outright lifetime gifts
Outright lifetime gifts (to any individual or organisation) suffer no immediate IHT liability and are free of IHT if you survive seven years after making them. Gifts given less than 7 years before you die may be taxed depending on the value, who they are given to, and how many years it was given before you die. There is no limit on the amount that can be gifted.
3. Small gifts exemption
The £250 small gifts exemption enables you to give £250 to any number of people of your choosing and will immediately be exempt from IHT. However, the drawbacks of this exemption mean you are unable to use it together with other exemptions and can’t be included in a larger gift.
Despite these amounts seeming small relative to someone with a significant estate, the annual exemption’s compound effect over a period of time can generate significant IHT savings.
4. Annual exemption
The annual exemption rate is set at £3,000 and married couples are able to utilise two allowances, giving them a total of £6,000 per year to use.
This allows you to give away up to £3,000 each tax year without the gift being added to your estate for Inheritance Tax (IHT) purposes. It’s one of the simplest and most useful tools for reducing the value of your estate over time.
If you didn’t use last year’s exemption, you can carry it forward one year. Gifts above the allowance may still be exempt depending on other rules (e.g., small gifts, wedding gifts, normal expenditure out of income) or may become potentially exempt transfers subject to the 7‑year rule.
Effective Inheritance Tax and estate planning
For your estate to be able to benefit from any of the above strategies, it is important that you keep clear records of the related transactions.
There are other steps you can take in addition to those mentioned above, such as spouse and civil partner exemptions and agricultural and business property reliefs, however, as with any financial and tax planning around this area, it is advisable to seek advice as to what is most appropriate for you and your family.
Advice on Inheritance Tax-related matters could be provided by a mixture of both our financial planning and tax specialists. To discuss how you could reduce your IHT liability, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
