Managing Your Inheritance In A Tax-Efficient Way

Managing your inheritance in a tax-efficient way

Are you wondering how to best manage your estate for a tax-efficient inheritance?

If so, it's a good time to review your financial planning and understand the options available. In this guide, we’ll provide a clear breakdown of Inheritance Tax, your estate and strategies to minimise your tax burden.

What is Inheritance Tax?

Inheritance Tax is a tax levied on the value of your estate passed down to beneficiaries after your death. Anything above the tax-free threshold (currently £325,000 per person as of 2025/26 tax year) is taxed at a rate of 40%. There are some exemptions, however, such as the additional Residence Nil Rate Band (currently £175,000 per person as of 2025/26 tax year) if you leave your main residence to a direct descendant.

Tax rules are subject to change and depend on individual circumstances. You should seek personalised advice.

What classes as my estate?

Your estate encompasses everything you own at the time of your death, including:

·      Property

·      Savings and investments

·      Cars and other vehicles

·      Personal possessions with significant value

Ways to manage your estate in a tax-efficient manner

There are several ways to minimise your Inheritance Tax bill:

Utilise tax-free allowances: Take full advantage of the Nil Rate Band and Residence Nil Rate Band. This can significantly reduce your taxable estate.

Gifts: You can give away a certain amount each year (currently £3,000 per person as of 2025/26 tax year ) without any tax implications. Gifts of regular income out of your surplus are also exempt, but ensure you keep proper records.

Pensions: Generally, pensions are not included in your estate for Inheritance Tax purposes. However, from April 2027, unspent pension pots will be included in the Inheritance Tax calculation. One option to consider is maximising your pension contributions.

Life insurance: Life insurance policies held in a trust can be excluded from your estate, reducing your Inheritance Tax liability.

Charitable donations: Leaving a portion of your estate to charity can significantly reduce your tax rate. Currently, if 10% or more of your net estate goes to charity, the Inheritance Tax rate on the remaining amount drops to 36%.

If you would like a clearer picture of your financial health and how best to minimise your tax bill, you should consider seeking Inheritance Tax advice from a specialist financial adviser.

The monetary gifting rules

Gifting is a valuable tool for reducing your tax liability, but there are several rules to consider:

The seven-year rule: Gifts made within seven years of your death may still be counted towards your estate for Inheritance Tax purposes. The earlier you gift, the less likely this is to be an issue.

Potentially exempt transfers (PETs): These are gifts exceeding the annual exemption (£3,000). If you survive seven years after making a PET, it generally won't be counted towards your estate.

Inheritance Tax planning is a complex topic, and the best approach depends on your individual circumstances. By understanding the basics and the financial strategies available, you can make informed decisions to help minimise the tax burden on your beneficiaries.