Inheritance Tax planning: How to reduce exposure without giving up control

Inheritance tax is often described as the most resented of all taxes. Many people have saved diligently, paid tax throughout their lives, and then discover that a significant slice of what remains may be taxed again on death at 40%. In some cases, the effective rate can be lower, but only where specific reliefs apply and only if the conditions are met at the relevant time.

What tends to concern many people later in life is not simply the rate, but the gradual way inheritance tax exposure can arise. Allowances have been fixed for many years, while property values, savings and investments have increased steadily. Without any single triggering event, estates that once appeared comfortably within the limits can move into taxable territory, often before there has been an opportunity to reflect on what, if anything,

should be done.

Inheritance tax planning is often presented as a technical exercise focused on reducing tax. In reality, it is a series of decisions about control, timing, flexibility and risk. Many planning routes require something to be given up during life in exchange for a potential tax saving later.

This article explains how inheritance tax works in broad terms and explores the main planning routes available under current law in England and Wales. It approaches inheritance tax planning as a deliberate decision-making process, rather than a search for tax tricks, and considers how families can reduce exposure without losing control over their assets or their future.

How inheritance tax works in England and Wales

Inheritance tax is charged on the value of an individual’s estate above the available allowances. An estate is broadly the total value of assets owned at death, less any liabilities.

The principal allowance is the nil rate band, currently £325,000. This figure has been frozen for several years and is expected to remain frozen until at least 2030.

An additional allowance, often referred to as the residence nil rate band, may apply where a qualifying home passes to direct descendants. This can be worth up to £175,000 per person, but it is subject to detailed conditions and tapers away for estates valued above £2 million.

Married couples and civil partners can usually transfer unused allowances to the surviving partner, potentially doubling the amount that can pass free of inheritance tax on the second death.

Any value above the available allowances is generally taxed at 40 percent.

Why more estates are now exposed to inheritance tax

Inheritance tax exposure usually develops gradually rather than as a result of one dramatic change. Common contributing factors include:

• Long-term growth in residential property values

• Investment portfolios built up over decades

• Allowances that have remained static while asset values rise

• A preference to retain assets for security later in life

• No clear plan for how an inheritance tax bill would be paid

The result is that many estates become asset-rich but cash-poor at the point inheritance tax becomes payable, placing pressure on executors and beneficiaries.

Inheritance tax planning is about trade-offs

There is no inheritance tax planning route that is entirely free of compromise. The central question is not whether tax can be reduced, but what must be given up in exchange.

Most planning decisions involve balancing:

• Tax efficiency

• Control during lifetime

• Flexibility to adapt to changing circumstances

• Administrative complexity and cost

• Risk, including investment and legislative risk

Problems tend to arise where planning focuses narrowly on tax reduction without sufficient regard to how assets are actually used, relied upon or needed during life.

The importance of a properly drafted will

A well-structured will is the foundation of effective inheritance tax planning. Without one, the intestacy rules apply, which can produce outcomes that are both tax-inefficient and inconsistent with personal wishes.

For unmarried couples, the position is particularly stark. Cohabitants have no automatic entitlement under the intestacy rules, regardless of the length of the relationship.

Even where a will does not immediately reduce inheritance tax, it provides the framework within which planning can occur. It allows for flexibility, the use of trusts where appropriate, and more effective use of allowances between spouses or civil partners.

Outdated or poorly drafted wills are a common source of avoidable inheritance tax problems.

Lifetime gifts and the loss of control

Lifetime gifting is one of the most direct ways to reduce inheritance tax exposure. Assets given away during life are no longer part of the estate at death.

Some gifts are immediately exempt. Larger gifts are usually treated as potentially exempt transfers and fall outside the estate if the donor survives seven years, with tapering relief applying after three years.

The drawback is straightforward. A gift involves a loss of control. Once assets are transferred, they belong to someone else.

This can raise concerns about:

• Financial security later in life

• Future care needs

• Changes in family relationships

• Divorce or insolvency of the recipient

Lifetime gifts are most effective when made as part of a broader strategy rather than as a reaction to anxiety about tax alone.

Trusts: control, protection and complexity

Trusts are often discussed in the context of inheritance tax planning, but their primary purpose is control and protection rather than tax reduction.

Bare trusts are generally treated as belonging to the beneficiary for inheritance tax purposes and are commonly used for administrative simplicity.

Discretionary trusts can provide flexibility over who benefits and when, but they may fall within the relevant property regime. This can involve inheritance tax charges on creation, ten-yearly charges and exit charges.

Life interest trusts are frequently used in second-marriage and family-protection planning. These arrangements are often about controlling outcomes and protecting beneficiaries rather than reducing inheritance tax.

Trusts bring cost, complexity and ongoing administrative responsibility. They should be used where they solve a genuine family or governance issue, not simply because they are perceived as tax-efficient.

Business assets and inheritance tax reliefs

Certain business and agricultural assets may qualify for inheritance tax reliefs, but only where strict conditions are met and continue to be met at death.

For business owners, the key issues are often continuity and fairness. Who will run the business. How beneficiaries will be treated. How any inheritance tax will be funded if relief does not apply as expected.

For investors, some investments are promoted on the basis that they may qualify for inheritance tax relief after a qualifying period. These remain investments first and foremost and carry capital risk, liquidity risk and uncertainty as to whether relief will be available when required.

Reliefs are also vulnerable to legislative change, which is why planning should not rely exclusively on any single relief.

Pensions and estate planning assumptions

Pensions are often assumed to fall outside the inheritance tax net. In practice, the position depends on the type of pension, nomination arrangements and the law at the relevant time.

Recent and proposed changes underline the importance of reviewing pension arrangements as part of an overall estate and inheritance tax strategy rather than treating them in isolation.

Liquidity and paying the inheritance tax bill

A common failure in inheritance tax planning is not addressing how the tax will actually be paid.

Inheritance tax is usually due within a relatively short period. Estates may consist largely of property or business assets that cannot easily be sold without disruption or loss.

Life assurance written in trust is one way of providing liquidity, but it is not the only option. The appropriate solution depends on the size of the exposure, the asset mix and the family’s priorities.

What effective inheritance tax planning looks like in practice

Effective inheritance tax planning is rarely achieved through a single step. It is usually a coherent strategy reviewed over time.

Three questions often bring clarity:

1. What do you want to retain control over during your lifetime?

2. What are you prepared to give away, and when?

3. How will any inheritance tax liability be funded without forcing rushed decisions?

When these questions are addressed, the legal and tax tools become easier to select and more likely to remain appropriate as circumstances change.

How Eddison Cogan Lawyers can help

Eddison Cogan Lawyers advise individuals and families on inheritance tax planning as part of wider estate, family and business considerations.

Our approach is practical and measured. We focus on helping clients understand the consequences of different options so decisions are made deliberately rather than under pressure.

If you are reviewing an existing will or trust structure, considering lifetime gifting, or thinking about how inheritance tax may affect your family or business, we invite you to speak with us.

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The content on this page is provided for general information purposes only. It does not constitute legal advice and should not be relied upon as such.

Law and practice may change over time, and the application of the law depends on the specific facts and circumstances of each case. You should always seek tailored legal advice before taking, or refraining from taking, any action based on the information contained in this article.

Reading this page does not create a solicitor-client relationship between you and Eddison Cogan Lawyers. Legal services are provided in accordance with the law of England and Wales.