Inheritance Tax: A Missed Opportunity? How Simple Steps Can Save You £100,000s
When people think of inheritance tax (IHT), it’s often with a sense of frustration — not just because of the tax itself, but because many families end up paying more than they need to. At Merranti Accounting, we regularly help clients put in place simple, effective strategies to reduce or even eliminate their IHT liability.
Too often, valuable reliefs are overlooked simply because of a lack of understanding or proactive planning. In this article, we’ll explain how using the annual exemption, nil-rate band, and potentially exempt transfers (PETs) — combined with smart gifting — can drastically reduce the IHT burden.
The Basics of Inheritance Tax (IHT)
Inheritance Tax is a tax on the value of a deceased person’s estate. The standard IHT rate is 40%, charged on anything above the available nil-rate band.
As of 2025/26, the IHT nil-rate band remains at £325,000 per person. Married couples and civil partners can combine their allowances — a key point we’ll explore later.
Annual Exemption – Use It or Lose It
Every individual can give away up to £3,000 per tax year without it counting towards their estate for IHT purposes. If you didn’t use this exemption in the previous tax year, you can carry it forward — but only for one year.
So, a couple could give away £6,000 each (£12,000 combined) in Year 1 if they haven’t used the previous year’s allowance, and then £6,000 again in Year 2, and so on.
These may seem like modest sums, but over a 10-year period, this can remove £60,000–£120,000 from your estate — tax-free.
More from HMRC: IHT exemptions and reliefs
The Nil-Rate Band – A Powerful Tool
The nil-rate band is the portion of your estate that is free from IHT. Currently fixed at £325,000, it’s available on both lifetime chargeable transfers and transfers made at death.
Importantly, potentially exempt transfers (PETs) — typically gifts made directly to individuals — fall outside the IHT net if the donor survives seven years from the date of the gift. These gifts are not included in the taxable estate after that point.
However, if the donor passes away within seven years, those PETs may become chargeable transfers and will eat into the nil-rate band. Worse still, if gifts were made within seven years of a prior chargeable transfer, the 14-year rule could apply, meaning even earlier gifts may impact the calculation.
PETs + Nil-Rate Band = Long-Term Savings
Let’s look at a powerful example of combining these tools:
Example – £1,354,000 Given Away IHT-Free
A married couple, over an 8-year period, gift a total of £1,354,000 to their adult children using:
- Their combined nil-rate bands in Year 1 (£325,000 x 2 = £650,000)
- Their combined annual exemptions over 8 years (8 x £3,000 x 2 = £48,000)
- Another £328,000 in Year 8 when the nil-rate bands are “reset”
If they survive seven years from each gift, the full £1.35 million is removed from their estate. That translates to a potential IHT saving of £541,600 (i.e., £1,354,000 x 40%).
This isn’t aggressive tax planning — it’s basic, legitimate IHT strategy that many people overlook.
Common Pitfall: Affordability and the “Gift with Reservation” Trap
Before making large gifts, consider your financial resilience. Once a gift is made, the donor gives up not just the asset, but also any income it may produce.
If you make a gift but continue to benefit from it — say, by gifting your home but still living in it rent-free — you may fall foul of the ‘gifts with reservation of benefit’ rules, and the gift will still be included in your estate.
Bonus Tip: Doubling Up the Savings
All the strategies mentioned can be doubled when used by both members of a married couple or civil partnership. Over time, this creates compounding reliefs.
Example:
- Husband gifts £331,000 (nil-rate + annual exemption) in Year 1, then £3,000 annually for 6 years
- Wife does the same from Year 8 onwards
This approach totals £1,354,000 of gifts, completely outside of the IHT net.
Additional Reliefs and Considerations
Other strategies worth exploring include:
- Business Property Relief (BPR): Up to 100% relief for qualifying business assets
- Normal Expenditure Out of Income: Gifts made regularly from surplus income can be exempt without limit, if they don’t affect your standard of living
- Gifts to Charity or Spouse: 100% relief available
- Capital Gains Tax (CGT): If gifting assets like shares or property, CGT may apply on lifetime gifts
Each scenario is unique — it’s important to review both IHT and CGT implications in tandem.
Don’t Forget: Your Will Still Matters
Good IHT planning goes hand-in-hand with a properly drafted Will. It ensures your assets pass according to your wishes and maximises available exemptions, like the residence nil-rate band (if passing the family home to children or grandchildren).
Final Thoughts
This kind of tax planning isn’t about exploiting loopholes — it’s about making sure your money goes to your loved ones, not the taxman. What may seem like “vanilla” planning can still be exceptionally effective when done systematically.
If you think your estate might be affected by IHT, or if you’ve not reviewed your Will and gifting strategy recently, now is the time.
Contact Us
At Merranti Accounting, we can help you:
- Review your estate and potential IHT exposure
- Plan a gifting strategy tailored to your needs
- Coordinate with financial advisers for investment and income planning
- Work with solicitors to ensure your Will reflects your wishes and tax strategy
