Mitigating Inheritance Tax and protecting lifetime gifts

Inheritance Tax (IHT) receipts have steadily been on the rise over recent years. HMRC reported last month that IHT receipts reached £7bn between April 2024 and January 2025, which marked an increase of £0.7bn compared to the same period of the previous year. This is likely to increase sharply once the changes to Agricultural and Business Relief come into effect in 2026.

These increases have been caused by several factors, including frozen IHT allowances (the nil rate band (NRB), which currently allows testators to leave £325,000 of their estate tax free, has been frozen since 2008), combined with the average size of estates growing rapidly (often as a result of property price increases), and the strong performance of investments over the last 10 years (although President Trump’s recently imposed tariffs might have slowed this temporarily).

Apart from estate planning to reduce the impact of IHT on death, finding ways to ensure your loved ones can pay this tax is becoming increasingly important. This article will consider some methods of mitigating IHT, and also how individuals can assist their loved ones in paying the IHT bill after they pass away.

Payment of Inheritance Tax – life insurance

It is becoming increasingly common for people to take out life insurance to help their loved ones settle the IHT bill. These policies are very useful planning tools, but there are several considerations to take into account when deciding whether this is appropriate.

Individuals need to consider the amount of cover that will be required, and review their estate regularly to ensure the cover is adequate.

If written into trust, the proceeds from these policies can be kept outside of the estate, avoiding an IHT charge. It is therefore also important to ensure that you have taken the relevant advice to ensure that your policy has been written into trust and that the terms of the trust are suitable.

One reason why these policies are so useful is that they are often paid to the beneficiaries of the policy relatively soon after death, which can assist in paying the IHT bill sooner rather than later. Given that IHT is due 6 months after the date of death, and late payment currently carries with it interest of 8.5%, being able to ensure the tax is paid within 6 months of date of death is essential, to avoid otherwise potentially large sums of interest.

Many estates struggle to find liquidity to settle their IHT bill within 6 months of death (particularly where much of an estate’s value is locked up in property), and whilst IHT due on certain assets can be paid in instalments, interest is still charged on these instalments (unless the assets qualify for Agricultural or Business Relief), which for many estates will mean the costs of paying interest on the instalments outweighs the benefit of paying over the long term.

Lifetime gifts

For those who are able, it is worth considering making lifetime gifts, as this can help to reduce the taxable value of an estate.

Lifetime gifts are potentially exempt transfers (PETs), and if the donor is still alive 7 years after making a gift (and has not received any benefit from the gifted assets after the gift), the value of that gift will fall outside their estate, and no IHT will be due. For gifts in excess of the NRB there is also a tapering of any IHT charged on those gifts which starts 3 years after any PET is made.  This progressively reduces the IHT chargeable on any PETs each year that passes.

Protecting lifetime gifts

It is not uncommon for someone who is thinking about making a lifetime gift, to express concerns around ensuring that such gifts are kept in the family (many donors wish for any gifts to their children to ultimately benefit their grandchildren), or they worry about gifts being dissipated by irresponsible or troubled beneficiaries.

For people in this position, it might be worth considering the potential use of nuptial agreements or gifting into trust, rather than gifting outright.

• Gifts into trust
  • Oftentimes donors express concern about a beneficiary making the best use of a gift. This might be because a beneficiary is too young, or there may be more serious concerns such as future bankruptcy, or worries around addiction or mental health issues, potentially leading to gifts being squandered
  • When a donor has concerns such as these, it is worth considering gifting money into trust, instead of to a beneficiary absolutely, as this can allow the donor to retain an element of control over gifted assets.
  • Gifts made into trust are known as lifetime chargeable transfers (LCTs). An individual can make LCTs of up to £325,000 before a 20% entry charge will occur on any assets gifted into trust. However, this allowance refreshes every 7 years, and everyone has their own allowance, which means that a married couple could make gifts of £650,000 into trust every 7 years without incurring any entry charges
  • There are different types of trust, and it is important to take legal advice before setting up a trust, so that you are fully aware of any potential tax implications, and to ensure that the trust fulfils your intentions properly.
• Nuptial agreements
  • A common concern for parents, especially when gifting family business or agricultural assets to their child, is keeping such assets in the family in the event of a future divorce or separation. Where these concerns arise it is worth asking beneficiaries of gifts to consider pre or post nuptial agreements before the gifts are made
  • Whilst nuptial agreements do not provide complete protection, they will provide guidance to a court if the recipient goes through a divorce, and can prove vital in ensuring assets are kept in the family
  • Both parties to the marriage or civil partnership need to take independent legal advice before entering into a nuptial agreement.

Concluding thoughts

Every estate, and every family, is different. The landscape has changed significantly over the last 10 years when it comes to estate planning, and it has become even more important to take tailored advice to explore options and find out what works best in your individual circumstances. If you would like to speak to a specialist adviser on anything mentioned in this article, or any wider estate planning queries you may have, please do get in touch here.