UK Estate Planning: Protect Your Wealth
Estate planning ensures your wealth passes to the people and causes you care about, while minimising the tax burden on your beneficiaries.
Inheritance Tax (IHT) Basics
Inheritance Tax is charged at 40% on the value of your estate above the available nil-rate bands.
| Nil-Rate Band | Amount |
|---|---|
| Nil-rate band | £325,000 |
| Residence nil-rate band | £175,000 |
| Combined maximum | £500,000 |
The residence nil-rate band applies when you leave your main home to direct descendants such as children or grandchildren.
Key Strategies to Reduce IHT
1. Gifting
You can give away assets during your lifetime. Most gifts become fully exempt from your estate after 7 years.
- Annual exemption: £3,000 per year
- Small gifts exemption: Up to £250 per person
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Normal expenditure: Regular gifts from surplus income
2. Trusts
Trusts allow you to control when and how beneficiaries receive assets. Common options include:
- Discretionary trusts: Trustees decide how to distribute income and capital
- Bare trusts: Beneficiary has an immediate right to the assets
- Interest in possession trusts: Beneficiary receives income but not capital
Be aware that trusts may have their own IHT charges.
3. Life Insurance in Trust
A life insurance policy written in trust pays directly to your beneficiaries without forming part of your estate. This means the payout is not subject to IHT.
4. Charitable Giving
If you leave at least 10% of your estate to charity, the IHT rate on the remaining estate is reduced from 40% to 36%.
Worked Example
Sarah’s estate is worth £800,000. She leaves her home to her children.
| Component | Amount |
|---|---|
| Total estate value | £800,000 |
| Nil-rate band | £325,000 |
| Residence nil-rate band | £175,000 |
| Total allowances | £500,000 |
| Taxable estate | £300,000 |
| IHT at 40% | £120,000 |
However, if Sarah has also:
- Made £50,000 in gifts more than 7 years before death
- Taken out a £200,000 life insurance policy in trust
Her estate value reduces to £550,000. After allowances of £500,000, only £50,000 is taxable, resulting in £20,000 IHT instead of £120,000.
Alternatively, if Sarah leaves £80,000 (10% of the original estate) to charity, the rate drops to 36% and her IHT falls to £108,000.
Planning Steps
- Write a valid will
- Review your assets and calculate your estate value
- Consider lifetime gifts within exemptions
- Write life insurance policies in trust
- Explore trust options with a solicitor
- Review your plan every 3-5 years
Important Notes
- IHT rules change frequently. Always check the latest guidance on GOV.UK.
- This guide is for informational purposes and does not constitute financial advice.
- Consider consulting a qualified estate planner or solicitor for your specific circumstances.