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How to protect your family from inheritance tax

As changes to the inheritance tax landscape affect increasing numbers of families across the UK, understanding the evolving environment has never been more important. Here, Hannah Rogers, Chartered financial planner at Fairstone, a leading wealth management firm in the UK and Ireland, highlights how expert guidance can help you take the necessary steps to protect your estate.

What is inheritance tax and why is it a problem?

Inheritance tax is charged at 40 per cent on anything you leave behind above a certain threshold. 

The standard tax-free allowance – known as the nil-rate band – presently stands at £325,000.

If you leave your main home to your children or grandchildren, you may also get a residence nil-rate band of £175,000.

This means a couple can potentially pass on up to £1 million without paying tax.

However, these thresholds are frozen until 2030, while property prices have continued to rise. 

That means more estates are going over the tax-free limit and triggering the 40 per cent tax. 

Without a plan in place, your family may have to sell your home or other assets just to pay the tax bill. 

And because the rules are complex, many people don’t realise they have options to reduce the impact.

Click here to see the official HMRC guidance.

Start planning now

Plan early

The sooner you begin planning, the more options you have to reduce inheritance tax payments.

If you leave it too late, some strategies, like gifting or placing assets in trust, might not be fully effective. 

An independent financial adviser can help you build a step-by-step plan based on your current assets, family situation and future goals.

Make use of gifting allowances

Using gifting allowances reduces the value of your estate, which means less tax to pay.

You can give away money or assets while you’re still alive, and some of these gifts are completely tax-free.

They include:

·      Annual exemption: You can give away £3000 each tax year without it counting towards inheritance tax

·      Small gifts: You can give up to £250 to any number of people each year

·      Wedding gifts: You can give up to £5000 to a child for their wedding, £2500 to a grandchild and £1000 to anyone else

·      Potentially exempt transfers: Larger gifts are called potentially exempt transfers – if you live for seven years after giving the gift, it won’t be taxed

Use trusts to pass on wealth

Moving money or assets outside your estate reduces the amount taxed.

A trust is a legal structure that lets you set aside assets for your loved ones while keeping some control over how and when they receive them.

Some trusts are taxed at lower rates or even avoid inheritance tax entirely, depending on how they’re set up. 

These include:

·      Bare trusts, which are simple and tax-effective for gifts to children

·      Discretionary trusts, which offer flexibility but may have different tax rules

However, trusts are complex, so work with a financial adviser or estate planner to make sure they’re set up correctly.

Consider life insurance to cover the tax bill

This ensures your family has the money to pay any inheritance tax without needing to sell assets.

You can take out a life insurance policy that pays out enough to cover the expected tax bill. 

If the policy is written in trust, the payout doesn’t count as part of your estate and won’t be taxed.

This can give you peace of mind that your loved ones won’t be forced to sell property, or dip into savings, to pay inheritance tax.

Plan with your spouse or civil partner 

This maximises both of your tax-free allowances.

Anything you leave to your spouse or civil partner is usually 100 per cent tax-free. 

You can also pass on any unused tax-free allowance to them when you die.

With good planning, a couple can pass on up to £1 million without paying inheritance tax.

An adviser can help you structure your wills and financial arrangements to make the most of this.

What does this advice and planning achieve?

When you act on the right advice, you can cut down the inheritance tax your loved ones may have to pay. 

It means more of your hard-earned money ends up where you want it: supporting your children, grandchildren or others you care about.

It also means fewer unexpected costs or last-minute decisions during a difficult time, and your family won’t need to panic about selling your home or finding cash to cover a tax bill. 

Instead, they can focus on what matters most, remembering you and honouring your wishes.

You keep control over how your wealth is passed on, and you make sure it is done in the most efficient way possible.

Does it matter where you live in the UK?

Yes.

While inheritance tax rules are the same across the UK, there are some key differences in how estates are handled in Scotland compared to England, Wales and Northern Ireland. 

For example, Scottish law says certain family members, like children or a spouse, have a legal right to part of your estate, no matter what your will says. 

This applies to money and belongings – called moveable assets – and is known as legal rights. 

The process of managing someone’s estate after they pass away – called confirmation in Scotland and probate elsewhere – follows different rules. 

If you live in Scotland or own property there, it is important to work with an independent financial adviser or wealth manager based in the country, or someone who fully understands Scottish law. 

They can help make sure your plans still work the way you want them to.

Why advice matters

Inheritance tax is complicated and the rules can change.

Everyone’s situation is different, and what works for one person might not work for another. 

A qualified independent financial adviser or wealth manager can explain your options in plain language, help you make informed decisions and guide you through the paperwork.

Getting expert support for inheritance tax and estate planning means you’re not leaving your loved ones with avoidable stress or an unexpected tax bill. 

Instead, you’re giving them the gift of security, stability and more of the wealth you worked hard to build.

If you’re not sure where to start, speaking to a professional is the best first step. 

We’re here to help 

For more information on how Fairstone could guide you through the inheritance tax landscape, visit its website or call 0800 884 0840.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. 

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, AND YOU MAY NOT GET BACK THE AMOUNT YOU ORIGINALLY INVESTED.

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