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How to minimise the impact of Inheritance Tax

05 February 2025

10 minute read

Learn why early inheritance tax planning is crucial to protecting your legacy and reducing future tax burdens for your family.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice. Barclays does not offer tax advice and the article below does not constitute advice .

Growing wealth is usually at the heart of any investment strategy. Minimising tax on your investments is an equally popular pastime with the help of ISA and pension tax wrappers.

But as well as minimising tax liability for yourself, it’s important to consider that you might end up with an estate with a high value which ends up with a large inheritance tax (IHT) liability for your family when you’re gone.

Inheritance tax planning sounds like something to put off until later in life. But, it’s never too early to start thinking about it.

IHT explained

Assets left in an estate when people die may be subject to IHT, which is generally charged at 40% on estates valued at more than £325,000 (where the £325,000 nil rate band has not been used in lifetime, by lifetime chargeable transfers). The allowance can double up to £650,000 if the deceased was married or in a civil partnership and their spouse or civil partner died before them, and did not use all of their own allowance.

There is also the residence nil rate band that can increase the IHT free limit up to £500,000 per person where the main residence is transferred to a direct descendant on death and the total estate is valued below £2,000,000. The residence nil rate band can also be transferred to a surviving spouse or civil partner if the full sum isn’t used on the first death.

So, a married couple or civil partners, can potentially pass on £1 million of assets in their estate, free of inheritance tax.

Where an estate is valued between £2 million and £2,350,000, the residence nil rate band is reduced by £1 for every £2 the estate is valued over £2 million. As such, an estate worth £2,350,000 or more will not benefit from the residence nil rate band.

The general 40% inheritance tax rate means that it may be worth doing some estate planning to make sure any allowances are maximised.

Getting started

Make a Will

Writing a Will is an important starting point for IHT planning. As well as ensuring your wealth goes to those you want as beneficiaries, you can include some tax planning. For example, it might be tax efficient to make a Will that transfers some assets to children or grandchildren after the death of the first spouse or civil partner.

If you’ve already made one, it’s important to review it periodically. For example, a Will written in your 40s may be well out of date by your 60s, if your circumstances change.

Life events, such as marriage or divorce, the birth of children or grandchildren, and starting or selling a business, can leave your Will out-of-date. Reviewing, and potentially updating, your Will is crucial.

It’s worth noting that Wills do not cover pensions or trusts. The transfer of any assets held in these structures is covered separately, by a ‘nomination form’ or ‘letter of wishes’, which you would need to arrange alongside a Will. It is worth reviewing these documents if your personal circumstances change.

Lee Platt, Wealth Planner at Barclays explains: “Getting professional advice on tax planning can ensure your Will is as tax efficient as possible.”

Intergenerational wealth transfer

One is to start reducing the value of your estate while you’re still around. Many parents prefer to gift money to help grown-up children while they’re able to see first-hand the difference it can make, rather than leaving this money as inheritance. This means you can help children more with immediate living costs, a property purchase or school or university tuition fees for grandchildren.

By gifting money, you can reduce the value of your estate and you can reduce the amount left in your estate that HM Revenue & Customs (HMRC) can tax when it eventually comes to assessing IHT.

There are currently several allowances available under tax rules, although this could change in future, which allow you to gift money with potentially no IHT implications.

You can gift £3,000 per tax year plus any unused £3,000 allowance from the previous tax year and any number of £250 sums to different people, provided this wasn’t already covered by another allowance.

For weddings and civil partnerships, a parent (including stepparent) can gift up to £5,000, grandparents or great grandparents can gift up to £2,500, and any other person can gift up to £1,000 – all within the IHT allowance, and hence IHT free.

It is also possible to give away any amount and there being zero IHT to pay – under a so-called potentially exempt transfer (PET). For this to happen you must live for seven years after you’ve gifted the assets, whether it’s property, shares or cash.

If you don’t survive the full seven years, tax is generally charged at 40% on gifts made in the three years before your death, then on a sliding scale, whereby the tax charge reduces by 10% for every year survived after the third year from gifting, until the seventh year is up. Your available nil rate band, of currently up to £325,000 can also reduce the failed PET.

If you gift non-cash assets, you might have to pay capital gains tax at the point of transfer if the chargeable asset has risen in value since you purchased or inherited it. How much you pay, if anything, will depend on individual circumstances.

Setting up a trust

There are a number of trusts you can create to potentially reduce IHT. Although, from 6 April 2025, many of the tax efficiencies connected with offshore trusts will be removed, in specific circumstances there may still be tax benefits of placing assets into a UK or an offshore trust.

Subject to specific circumstances, assets in a trust are no longer part of your estate and so may not count towards the IHT liability. A range of trusts are available and the right one for you will depend on your circumstances. It’s prudent to get professional advice on trusts as they can be complicated.

Wealth warning: Before you start parting with any money, it’s important not to run the risk of leaving yourself short.

Lee Platt explains: “There are important considerations when considering giving away some of your wealth before you die. You must ensure you have enough money to pay for long term care, should you need it, or for any other unforeseen expenses. You don’t want to leave yourself short simply to minimise tax.

You'll need to consider how much capital and income you have and how much you will need to meet your expenses in the future.

Once you have a good idea of how much surplus income and capital you have, you can start to think about passing assets or income onto the next generation.

On all counts, it is vital to keep a record of all the gifts you make and who received them to avoid confusion in the future.”

Unlimited cash gifts

There is a lesser-known – yet very valuable – exemption that allows you to give away any sum of money free of IHT.

The catch is that it needs to be from surplus income (broadly meaning you can afford the payments after meeting your usual living costs) and you would need to be able to prove to HMRC that the gifts were from income and that they did not change your lifestyle. These gifts would also need to be made on a regular basis however the recipients can vary.

Invest wisely

You can also investigate specialist investments that qualify for IHT relief. But only if these are appropriate for you.

These include Enterprise Investment Schemes (EIS)1 where you can back new British businesses. If those EIS shares are held for at least two years before death, they may qualify for full IHT relief. You can invest up to £1 million each tax year. However, from 6 April 2026 the 100% relief will be subject to a £1 million cap (the £1 million cap can apply to multiple assets, including assets that qualify for agricultural property relief). The remaining value above £1 million will attract 50% IHT relief.

The high risk nature of small and new companies means that the EIS itself is a high risk.
EIS investments are not available on Smart Investor – they can be accessed with the help of an adviser or Wealth Planner if they are appropriate for you.

Another route is to buy shares in companies listed on AIM (Alternative Investment Market) which is home to UK businesses. Again, if you hold shares for more than two years, those eligible are currently IHT-free. From April 2026, however, AIM shares will no longer be entirely exempt from IHT. Chancellor Rachel Reeves announced in her Budget in October 2024 that there would be a 20% IHT tax on qualifying AIM shares (so only 50% relief).2

It’s possible to invest in AIM shares on Smart Investor. Though it’s important to weigh up the pros and cons. While there are tax benefits, over the years, hundreds of companies listed on the AIM have failed, so it’s important to be prepared for the fact you might lose your money.

Learn more about holding AIM shares in a tax-efficient ISA

ISAs and pensions

It’s useful to know the rules when it comes to passing on investments held in ISAs and pensions.

Where investments are held in a tax-free ISA, the tax advantages can only be retained if left to a spouse or civil partner. Otherwise, ISA tax shelters will disappear on death.

One of the benefits of your pension is the ability for the funds held in the scheme to be passed to others after your death. Under current rules, if you die before the age of 75 the funds can be passed on free of tax (up to a certain limit if the withdrawal is a lump sum). If you die after you’ve reached 75, they’ll normally be subject to income tax at the recipient’s marginal rate. These rules help many families pass on pensions in a tax efficient manner as at present the funds are exempt for IHT regardless of the age the member passes away.

However, the rules are changing from 6 April 2027. In her Autumn 2024 Budget statement, Chancellor Rachel Reeves announced the government’s intention to bring unused pension funds (all residual pension balances at date of death) and death benefits within the value of an individual’s estate for inheritance tax purposes from 6 April 2027.

The key thing to remember is to nominate who should benefit – this is done through the pension provider and is entirely separate to a Will.

Lasting Power of Attorney

A lasting power of attorney (LPA) is a legal document that gives someone the authority to make decisions about property and finances on someone else’s behalf.

This could be invaluable should you develop a health condition unexpectedly that prevents you from being able to look after your own affairs, for example due to mental incapacity.

There are two different types of LPA you can apply for in the UK: one for health and welfare, and one for property and financial matters.

If your LPA is already up and running, you’ll need to register it with us before you can use it. You can do so by submitting your LPA details and documents online using our online form.

There are strong restrictions on an attorney conducting IHT planning for the donor. Legal advice should be sought on this matter.

Time to act?

Lee Platt adds: “Thoughts of mortality aren’t happy ones, but the fact remains that we will all die at some stage, and therefore it makes sense to have a financial plan in place to minimise taxes due on your wealth passed on, as well as the right things in place to ensure your wishes are carried out.

It’s never too early to start planning – making plans while you’re still in good health can make all the difference.”

If you are considering wider estate planning you may want to reach out to a qualified tax advisor or wealth manager.

Find out about Barclays Wealth Management

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