The Inheritance Tax Act 1984 is often seen as a threat to family wealth. But it also contains a range of provisions that — used correctly — can significantly reduce or even eliminate the IHT your estate will face. Here is how to navigate the key rules.
Start with the Basics: Know Your Thresholds
Before you can plan, you need to know where you stand. Add up the value of everything you own — property, savings, investments, business interests, and personal possessions. Compare this to your available nil-rate band (£325,000) and residence nil-rate band (£175,000 if applicable). If your estate is below £500,000 (or £1 million for a couple), you may have no IHT liability at all.
Use Your Annual Exemptions
The Act provides a £3,000 annual exemption — you can give away up to £3,000 each tax year completely free of IHT. Any unused allowance can be carried forward one year. You can also give up to £250 to any number of individuals each year, and make larger gifts on the occasion of a marriage or civil partnership.
Make Use of the Seven-Year Rule
Lifetime gifts become fully exempt from IHT if you survive seven years after making them. If you have assets you are comfortable giving away now — whether cash, investments, or property — doing so sooner rather than later starts the seven-year clock running. Even if you die within seven years, taper relief reduces the tax owed if you survived between three and seven years.
Normal expenditure out of income is one of the most underused exemptions in the Act. Regular gifts made out of surplus income — not capital — that do not affect your standard of living are fully exempt from IHT, with no seven-year rule. This can be a powerful tool for those with significant income.
Avoid the Gifts with Reservation Trap
One of the most common mistakes is trying to give away an asset — particularly the family home — while continuing to benefit from it. HMRC's gifts with reservation of benefit rules mean that such gifts are simply ignored for IHT purposes. If you want to give away your home, you must genuinely relinquish control and benefit.
Update Your Will
Your will is the cornerstone of IHT planning. Ensure it is structured to maximise the residence nil-rate band, make use of spousal exemptions, and reflect any changes in your family circumstances or estate value. A will that was drafted ten years ago may no longer be tax-efficient.