When is the best time to start planning for inheritance tax?
There’s a peculiar British habit of treating death like a distant cousin—acknowledged, but rarely invited to dinner. We plan our holidays with precision, our retirement with diligence, and our weddings with care and attention to detail. But when it comes to inheritance tax, we often behave as though immortality were a viable financial strategy.
Let me be blunt: if you own property in the UK, especially in London or the Southeast, and you’re over the age of 40, you’re probably already late to the inheritance tax planning party. The nil-rate band—the threshold under which no IHT is paid—has been frozen at £325,000 since 2009.
Meanwhile, house prices have galloped ahead like a thoroughbred on Derby Day. The result? More estates than ever are being dragged into the IHT net, and HMRC is quietly rubbing its hands.
So, when should you start thinking about inheritance tax planning?
The answer is that if you have beneficiaries, as soon as your net worth is above the inheritance tax threshold. Now, let’s take a look at some of the key considerations around why and when you should start planning for inheritance tax.
In this section, we focus on:
- Using the seven-year rule for inheritance tax
- Property values and the potential impact on your estate
- Forthcoming changes to inheritance tax legislation
The seven-year rule and the gift of foresight
One of the most misunderstood aspects of IHT is the seven-year rule. If you give away assets and survive for seven years, those gifts fall outside your estate for tax purposes. But here’s the catch: taper relief only kicks in after three years, and gifts within that window are taxed at the full 40% rate. So if you’re thinking of passing on wealth, don’t wait until your twilight years when your health is uncertain.
Start gifting early. Not extravagantly, but strategically. Use your annual gift allowance of £3,000 per year, and consider regular gifts out of income, which can be exempt if they don’t affect your standard of living. Think of it as pruning the tree while it’s still growing, rather than hacking at it when it’s overgrown.
Property: The elephant in the room
For most people, the family home is their largest asset. If you’re leaving it to children or grandchildren, you may benefit from the residence nil-rate band, which can increase your IHT threshold to £500,000. Married couples can double that to £1 million. But beware: this only applies if the property is passed to direct descendants. Leave it to a niece for example, and the taxman will come knocking.
If your estate exceeds these thresholds, consider downsizing or using trusts. Yes, trusts sound like something reserved for aristocrats and offshore schemers, but they’re perfectly legitimate tools for managing wealth and reducing tax exposure. Just don’t try to DIY it—get proper advice.
Pension pots and the looming storm
From 2027, unused pension pots may become liable for IHT. This is a seismic shift. Pensions have long been the darling of estate planners, offering a tax-efficient way to pass on wealth. But the tide is turning. If you’re sitting on a sizeable pension, now is the time to review your beneficiary nominations and consider a drawing down strategically.
The emotional side of inheritance tax planning
Inheritance tax planning isn’t just about numbers. It’s about legacy. Too often, families avoid these conversations until it’s too late. But talking about death can be liberating. It allows you to make informed choices, to avoid family disputes, and to ensure that your wishes are respected.
When is The Best time to start planning for inheritance tax? Summary
Inheritance tax planning is not a luxury; it’s a necessity. Start early, plan wisely, and talk openly. Because in the end, the greatest gift you can leave your loved ones is clarity.
Here’s a quick summary of the key points in this article:
- Most UK homeowners are already caught by IHT: With the £325,000 threshold frozen since 2009 and property values soaring, many estates now face significant tax exposure.
- Start inheritance tax planning early: Once your assets exceed the nil-rate band or you have named beneficiaries, delay only costs you.
- Use the seven-year rule wisely: Gifts made seven years before death fall outside your estate, with taper relief reducing tax after three years.
- Leverage annual and income gift allowances: Small, regular gifts can reduce your taxable estate over time without affecting your lifestyle.
- Plan for property inheritance carefully: The residence nil-rate band can lift your threshold to £500,000 (£1m for couples), but only if leaving the home to direct descendants.
- Prepare for 2027 pension tax changes: Unused pension pots may soon fall within IHT scope, so review beneficiaries and withdrawal strategies now.
- Have honest family discussions: Open communication prevents disputes and ensures your wishes are carried out smoothly.
- Seek professional advice: Trusts, gifting strategies, and property planning require expert guidance to avoid costly mistakes.
