Lower Inheritance Tax Rate: Is Your Estate Eligible for the Lower 36%?

Inheritance Tax (IHT) is applied to a deceased person's estate, encompassing property, money and possessions.  While many only consider IHT when managing a loved one's estate, proactive estate planning can help minimise tax liabilities and preserve more wealth for beneficiaries.

For the 2024/2025 tax year, the nil-rate band (IHT threshold) remains £325,000 for individuals without property interests or direct descendants (such as children or stepchildren).  Any amount above this threshold is subject to IHT at 40%.  However, with strategic estate planning, individuals can reduce this liability, most notably by making charitable donations, which can lower the tax rate to 36% under specific conditions. 

Additionally,  any unused nil-rate band from a deceased individual can be transferred to their surviving spouse or civil partner. Qualifying estates can pass on up to £500,000 of estate tax-free. If the nil-rate band remains unused, the surviving spouse or civil partners' estate may transfer up to £1 million without incurring IHT.

To benefit from the reduced 36% IHT rate, at least 10% of the taxable estate (after deducting nil-rate bands and available tax reliefs) must be left to a registered charity.  This donation must be clearly outlined in a valid Will. 

Consider an estate worth £1 million: 

Scenario 1: Without Charitable Giving

• Net estate value: £1,000,000
• Nil-rate band: £325,000
• Taxable amount: £675,000 (taxed at 40%)
• IHT due: £270,000

Scenario 2: With Charity Giving (10% of the estate)

• Net estate value:  £1,000,000
• Gift to charity: £100,000
• Nil-rate band: £325,000
• Taxable amount: £575,000 (taxed at 36%)
• IHT due: £207,000

By incorporating charitable giving into estate planning, this estate would save £63,000 in IHT liability while supporting a meaningful cause. 

• With upcoming changes to IHT rules, strategic estate planning is more crucial than ever.  The following key areas require careful planning, with professional legal guidance ensuring compliance and tax efficiency: 

1. Seven-Year Rule on Gifts

• Gifts made at least seven years before death may be exempt from IHT, allowing individuals to pass on wealth tax-free.  A Wills and Estate Planning solicitor can help structure gifts to reduce tax exposure.

2. IHT on Pensions

• Pensions are generally excluded from IHT, but it was recently announced that from April 2027, pensions will no longer be exempt from IHT.  A Wills and Estate Planning expert can assess pension assets and ensure they are structured tax-efficiently.

3. IHT for British Citizens Retiring Abroad

• Domicile and residency status affect whether an estate is liable for UK IHT on worldwide assets. A Cross-Border Estate Planning specialist can help you understand how foreign property and assets impact their tax liabilities. 

Many people delay estate planning, assuming it is a concern for later in life.  However, setting up a structured estate plan is vital for: 

• Charity and Control: a legally valid Will ensures your wishes are clearly documented and your assets are distributed as intended.  Without a Will, your estate will follow intestacy rules, which may not align with your preference. 
• Tax Efficiency:  a well-structured estate plan can reduce IHT liabilities, ensuring more of your wealth is passed on to beneficiaries.  Legal professionals can help implement trusts and gifting strategies to achieve this. 
• Avoiding Family Disputes: A clear, legally binding Will minimises the risk of inheritance disputes, which can lead to lengthy and costly legal battles among family members over inheritance. 
• Protecting Vulnerable Beneficiaries:  a Will ensures proper provisions for vulnerable dependents, such as appointing guardians for minor children or setting up trusts to manage their inheritance responsibly. 

Failing to plan can leave loved ones facing necessary financial and legal complications.  By acting early to set up a Will and review it regularly, you secure your legacy and ensure your wishes are legally protected.