Making use of your inheritance tax allowances

Inheritance tax (IHT) is one of the most misunderstood areas of UK tax planning. Many people assume they’ll never need to worry about it, whilst others pay far more than necessary because they haven’t used their allowances effectively. The truth is that with careful planning, you can significantly reduce the IHT burden on your estate—and it’s never too early to start thinking about it.

Understanding your nil-rate band

The nil-rate band is your basic IHT allowance. For the 2024/25 tax year, this sits at £325,000 per person. Anything you leave within this amount passes to your beneficiaries free of IHT. Once you exceed it, IHT is charged at 40% on the excess.

This might sound straightforward, but many people don’t realise their estate may be worth more than they think. Your estate includes your home, savings, investments, vehicles, personal belongings, and life insurance proceeds. In the South West, where property values continue to be significant, exceeding the nil-rate band is increasingly common—even for families who don’t consider themselves particularly wealthy.

The residence nil-rate band (RNRB)

If you’re planning to pass your home to direct descendants (children or grandchildren), there’s an additional allowance worth knowing about: the residence nil-rate band. This adds an extra £175,000 per person in the 2024/25 tax year, specifically for your main residence.

So if you’re married or in a civil partnership, together you could potentially pass £1,000,000 to your children (£325,000 × 2 basic allowances, plus £175,000 × 2 residence allowances) without triggering any IHT. That’s a significant advantage—but only if you plan correctly and ensure your will is set up to take advantage of it.

The RNRB does have conditions. Your property must be left to direct descendants, and there are rules about downsizing or moving to a smaller property. If these circumstances apply to you, it’s worth discussing with a professional to ensure you’re maximising this relief.

Making use of exemptions and reliefs

Beyond your main allowances, HMRC offers several exemptions that can further reduce your IHT liability:

Annual exemption: You can give away £3,000 each tax year free of IHT (unused allowance can be carried forward one year).

Small gifts exemption: Gifts of up to £250 per person per year are exempt, as long as they’re not from your £3,000 annual exemption.

Charitable giving: If you leave at least 10% of your estate to a registered charity, the IHT rate on the remainder drops from 40% to 36%. This can be surprisingly tax-efficient.

Business relief and agricultural relief: If you own a business or agricultural property, substantial reliefs may be available that could reduce your IHT liability significantly. These reliefs are complex and require careful structuring, but they can be transformative for family businesses.

Gifts during lifetime: Gifts made more than seven years before death are usually exempt from IHT entirely. This is where forward planning really matters.

Getting your estate planning right

The most important thing is not to leave IHT planning to chance. Many people create a will without considering the tax implications, which means their executors and beneficiaries end up paying far more than necessary.

A well-structured estate plan—supported by a properly drafted will, potentially a trust, and regular reviews—can save thousands. This is particularly important if you’re married or in a civil partnership, where spousal transfers can work very effectively. You should also review your arrangements if your circumstances change: a significant inheritance yourself, a new property purchase, or changes to your family situation can all affect your IHT position.

Conclusion

IHT allowances represent a significant tax-planning opportunity, but they only benefit you if you use them. At Severn Accounting, we’ve helped many clients across Worcestershire and beyond structure their finances to minimise their inheritance tax burden—and it’s often simpler than people expect.

If you’re unsure whether you’re making the best use of your allowances, or if you’d like to review your current arrangements, we’d encourage you to get in touch. Estate planning is deeply personal, and there’s no one-size-fits-all approach.

For tailored advice, contact Severn Accounting — we’re here to help.