How estate planning can help protect family wealth from being eroded by Inheritance Tax

There is one person in Britain that is free to grieve with the knowledge that he is immune from any potential Inheritance Tax (IHT) on his mother’s estate — King Charles III.

A rule introduced in 1993 by the UK government exempted sovereigns from paying Inheritance Tax when transferring assets onto each other.

His Majesty automatically inherited Queen Elizabeth II’s Duchy of Lancaster estate upon her death. The estate is said to be worth more than £652 million and is free of the usual 40% IHT on the value of estates over the£325,000 threshold (or £500,000 with the residence nil-rate band added).

Unfortunately, regular Britons aren’t so lucky as, according to FTAdviser, the Treasury raked in £6.1 billion in IHT for the 2021/22 tax year, a rise of 14% on the previous year. As the IHT-free threshold is currently frozen until 2026, that figure is expected to continue to increase in the near future.

But don’t panic! There are plenty of ways you can seek to reduce your potential IHT bill and leave your loved ones with as much of your estate as possible.

Read on to learn about the key elements of UK IHT rules and various ways you can use estate planning methods to avoid your family’s wealth being eroded by IHT.

IHT thresholds in the UK are frozen and haven’t kept up with the rate of inflation

IHT rules in the UK allow you to pass on an estate up to the value of £325,000 free of tax implications. However, anything above the threshold will be taxed at a rate of 40%.

If you opt to leave your home to your children (including adopted, foster, or stepchildren) or grandchildren, this can increase your threshold by using an allowance  known as the “residence nil-rate band” to raise the tax-free limit from £325,000 to as much as £500,000 depending on the property value.

If you’re married or in a civil partnership and don’t use your IHT-free allowance on your death, these can be claimed on second death to use against your partner’s estate when they die.

You also normally do not need to pay IHT if you leave your estate to your spouse, civil partner, or to charity. Your partner could also possibly benefit from the terms of your State Pension — you can learn seven valuable facts about UK State Pension rules for Brits living abroad in this useful article.

IHT can differ around the world, but if you have any UK assets you are seeking to pass on, it’s important to be aware of British rules.

Write a will to avoid your estate being distributed under government guidance

A will allows you to control the manner that your wealth is passed onto your loved ones.

While your spouse or civil partner is likely to inherit your assets even if you do not have a written will, extended family members, a partner to whom you’re not married or in a civil partnership, and friends are unlikely to receive any part of your estate that you might wish to bestow upon them.

In the event that you do not have a will, your assets will be distributed according to the rules of intestacy in the relevant jurisdiction –England, Wales, Scotland, or Northern Ireland.

The intestacy rules don’t necessarily mean that your estate will be distributed in the most tax-efficient way. So, your loved ones might be left facing a large IHT bill upon your death.

It can become an especially complicated process if you have an estate split between several jurisdictions and their respective regulations. A clear and defined will can greatly reduce any additional stress on your family while they’re grieving.

Decide to oversee a living legacy by gifting your wealth

One way to avoid leaving behind a substantial IHT bill is to make gifts from your wealth while you’re still alive.

You can observe the benefits to your family’s individual lives, as you help them overcome major financial hurdles, with the knowledge that your loved ones are safe and secure in life.

In the UK, there are tax-efficient rules around gifting that can help you avoid IHT.

Examples of tax-efficient gifts include:

  • Annual gifts of up to £3,000 (2022/23 tax year), your annual exemption – a tax-efficient benefit which you can use each tax year
  • Wedding gifts (or civil partnership gifts) that can be given to your friends and family at rates of up to £5,000 for your children, £2,500 for your grandchildren or great-grandchildren, or £1,000 to any other individual
  • Small gifts of up to £250 to any individual in a single tax year (not available where the gift recipient has received any larger gift from you in that tax year).
  • Regular gifts of surplus income.


In addition, gifts usually fall outside of your estate for IHT purposes if you survive for seven years after making them. These gifts are known as “potentially exempt transfers” (PETs) or “chargeable lifetime transfers” (CLTs).

So, gifting earlier in life increases the odds of your gift remaining potentially IHT-free.

Keep your pension savings invested and draw an income from other assets

Your pension is likely to be one of the largest assets you have. According to the Office for National Statistics, private pension wealth represents a greater share of household wealth than property.

Crucially, the money held in your pension is usually considered outside of your estate for IHT purposes.

So, while your first instinct may be to access your pension to provide an income in retirement, it could be worth considering drawing on other assets and leaving your pension to your loved ones.

The beneficiary of the pension may need to pay Income Tax at their nominal rate when they access the savings. The rate will depend on the age you pass away and how they access it, but it could still end up being lower than paying IHT.

If you’re concerned about how IHT might affect your legacy and leaving your pension to loved ones is something you’re considering, it’s important to review your long-term financial plan. We can help you understand alternative ways to create a tax-efficient income in retirement that allows you to meet your goals.

Consider charitable giving and donate some of your wealth to good causes

In the UK, gifts left to charities almost always fall outside your estate in terms of IHT rules.

Gifting to your chosen charities in your will can also reduce your IHT rate above the £325,000 threshold from 40% to 36%, with the provision that at least 10% of your net estate is passed onto charity.

Your net estate is defined as the remaining taxable value of your estate once factors such as the nil-rate band as well as any other debts or liabilities have been repaid.

Get in touch

Our advisers provide specialist advice to British expats and international employees living around the world. We provide tax-efficient and tax-compliant solutions for those that have decided to leave the UK and have found a new home overseas.

We put your long-term goals at the centre of the financial plan we put in place for you, helping you to make your dreams a reality.

If you’d like help navigating how UK IHT rules might affect your estate, please get in touch.

Email us at or give us a call on +44 1689 493455.

Please note:

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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