Reducing the burden of inheritance tax: how to protect your family’s future

Reducing the burden of inheritance tax: how to protect your family’s future
Protecting your family’s wealth takes careful planning. With inheritance tax thresholds frozen until 2030, more estates face rising tax bills. Lycetts explores key strategies to help you safeguard your legacy and reduce your inheritance tax liability.
Estate planning isn’t just about securing a comfortable retirement – it’s about protecting your family’s financial future.
In the UK, inheritance tax (IHT) can significantly erode the value of your estate if not managed effectively.
By understanding IHT and planning strategically, you can safeguard more of your assets for your loved ones.

Understanding the IHT landscape
IHT is charged at 40% on the portion of an estate exceeding the £325,000 nil-rate band.
Married couples and civil partners can transfer any unused portion of this allowance, effectively doubling the threshold to £650,000.
In addition to the nil-rate band, the Residence Nil-Rate Band (RNRB) provides an extra £175,000 per person when passing the family home to direct descendants.
This means that a couple could potentially pass on up to £1 million tax-free. However, estates exceeding £2 million are subject to a taper, reducing the RNRB by £1 for every £2 over this threshold.
With these thresholds now fixed until April 2030, instead of rising with inflation, more estates are likely to be affected by IHT over time.

Four key strategies for IHT mitigation
1. Gifting assets during your lifetime
Gifting is a powerful tool for reducing IHT liability.
Each year, you can gift up to £3,000 tax-free, and if unused, this allowance can be carried forward for one year.
Small gifts of up to £250 per person can be made to multiple individuals annually, while larger gifts for marriage or civil partnerships – such as £5,000 from parents or £2,500 from grandparents – are also exempt.
Regular gifts from surplus income, such as covering a grandchild’s school fees, may also be IHT-free, provided they do not affect your standard of living.
Larger gifts, known as Potentially Exempt Transfers (PETs), are tax-free if the donor survives for seven years.
If the donor passes away between three and seven years, taper relief may apply, reducing the tax owed.

2. Using trusts for estate planning
Trusts allow you to pass on wealth while maintaining control over how it is distributed.
By placing assets in a trust, they may no longer be considered part of your estate for IHT purposes, helping to reduce tax liability.
Trusts can also ensure beneficiaries receive funds under specific conditions, such as reaching a certain age or for designated purposes such as education.
However, some trusts are subject to periodic and exit charges, making professional advice essential to determine the most suitable trust structure for your estate.
Trustees play a crucial role in estate planning, as they are legally accountable for managing trust assets and can be held personally liable for any mismanagement or disputes.
Decisions made by trustees can sometimes lead to legal challenges, particularly if beneficiaries feel their interests have not been adequately considered. Errors in managing trust assets, even when unintentional, can result in financial losses or legal claims.
To mitigate these risks, trustees should consider Family Trust Liability Insurance, which provides financial protection against claims of negligence or breach of trust. This covers legal fees and safeguards trust assets, even when exoneration clauses in the trust deed are limited or absent.

3. Business and Agricultural Property Relief
Business and Agricultural Property Relief (BPR and APR) help business owners and farmers pass on assets tax-efficiently.

Currently, both offer up to 100% IHT relief on qualifying assets, such as unquoted trading company shares and agricultural land.
However, from April 2026, only the first £1 million of combined business and agricultural property will receive 100% relief, with any excess taxed at 50%.
Shares in AIM-listed companies will only qualify for 50% relief from 2026.
With these changes ahead, proactive planning is more important than ever.

4. Life insurance policies in trust
A life insurance policy written in trust can provide a lump sum to cover an IHT bill.
This ensures that beneficiaries receive funds quickly, without increasing the estate’s taxable value or forcing the sale of assets to cover tax liabilities.

The importance of family conversations
Estate planning isn’t just about financial strategies – it’s about communication.
Discussing your intentions with your family can prevent disputes and ensure your wishes are carried out smoothly.
Conversations should cover key aspects such as tax implications, trust responsibilities and any conditions attached to gifts or inheritances.
Keeping wills and powers of attorney up-to-date ensures that estate plans remain relevant as circumstances change.

Navigating the complexities of IHT
Given the evolving nature of tax legislation, estate planning requires expert guidance.
Lycetts Financial Services can provide personalised IHT mitigation strategies, ensure you maximise available exemptions and reliefs, and help you regularly review your estate plan to adapt to legislative changes.
For trustees, we provide guidance on risk management and liability protection, ensuring they fulfil their duties with confidence.
By taking a proactive approach, you can ensure your loved ones inherit more of what you’ve worked hard to build while reducing potential financial stress.