Inheritance Tax Planning: 5 Exemptions Everyone Should Use

Watch the video on YouTube

Inheritance Tax (IHT) is often called a "voluntary tax"—voluntary because, with the right strategy, you can legally avoid paying the standard 40%.

Unfortunately, I see a dangerous amount of misinformation circulating, leading families to fall into costly traps that actually increase their tax bills rather than reducing them.

If you want to protect your legacy and ensure your wealth stays in the hands of your family, you need a proactive plan. Here is a breakdown of how to structure your affairs effectively and the common pitfalls you must avoid.

5 Powerful Exemptions You Should Be Using

Many people overlook the simple tools already available to them. While these may seem small individually, they add up significantly when integrated into a long-term plan.

• The Annual Exemption: You can gift £3,000 per person per tax year. Married couples can combine this to gift £6,000. If you didn’t use it last year, you can carry that allowance forward, meaning a couple can potentially move £12,000 out of their estate immediately.
• Small Gifts Exemption: You can gift £250 annually to an unlimited number of people. This is a great way to distribute wealth across a wider family circle, provided those recipients haven't already received a gift under the £3,000 annual allowance.
• Gifts Out of Excess Income: This is one of the most underused but powerful strategies. If you have regular income that exceeds your cost of living, you can gift that excess immediately. There is no seven-year waiting period—the money is outside your estate the moment you give it. Because HMRC watches this closely, you must document that these gifts do not impact your standard of living.
• Wedding Gifts: Use weddings to your advantage. Parents can gift £5,000, grandparents £2,500, and others £1,000 tax-free. These gifts must be made before the wedding takes place to qualify.
• Charitable Giving: If you plan to leave a gift to charity, ensure it equals at least 10% of your net estate (after the nil-rate band). This triggers a reduction in the IHT rate on the remainder of your estate from 40% to 36%. Note that for this to qualify under current rules, your will must clearly name a UK charity.

The "Cowboy" Traps to Avoid

I see many families lose tens of thousands of pounds to "asset protection" schemes that sound too good to be true.

1. The Main Home Trust Trap

Aggressive firms often sell the idea of placing your main home into a trust to avoid tax.

Do not fall for this. Under the "gift with reservation of benefit" rule, if you continue to live in your home rent-free, HMRC will simply ignore the trust, and the house will be taxed as part of your estate at 40%. Worse, you risk losing the Residence Nil Rate Band—a specific allowance that could have saved your family up to £140,000 in tax for a married couple.

2. Direct Property Transfers

Transferring your home's deed to your children without professional advice is a mistake. Gifting your home while you still live there usually fails for IHT (gift with reservation). There is normally no SDLT unless a mortgage passes, and CGT is often covered by private residence relief, but take advice first.

I see many families lose tens of thousands of pounds to "asset protection" schemes that sound too good to be true.

Advanced Planning for Larger Estates

When your wealth reaches a certain level, you need more sophisticated tools.

• Family Investment Companies (FICs): Unlike trusts, FICs have no upper limit on funding, allowing for significant capital injection without lifetime IHT charges. Through "freezer shares," we can freeze the value of your assets so that any future growth sits entirely outside your estate.
• Business Property Relief (BPR): You can potentially move up to £2.5 million each (£5 million for a married couple) in trading company shares tax-free using BPR, with 50% relief above that. This is a high-level strategy that requires precise structuring to ensure it remains effective.

A Warning for International Investors

If you own high-value UK property but hold it through an offshore company or trust, you are not immune. Since 2017, UK residential property is within UK IHT regardless of the ownership structure. Furthermore, with the shift to a residency-based model as of April 2025, your domicile status is no longer the shield it once was.

If you are paying high annual fees to maintain an offshore structure that no longer saves you tax, it is time to wind it up. We can help you bring those assets back on-shore with as little tax cost as possible.

How to Take Action

Effective IHT planning is not about buying a "product"; it is about creating a bespoke strategy.

My firm doesn't just provide advice and leave you to figure out the implementation—we manage the entire process from paper to execution.

If you are serious about protecting your wealth, let’s look at your situation with a blank sheet of paper and build a structure that actually works.

Get in touch taxadvisory@aswatax.co.uk