The main reason to write a will is to ensure your wishes are carried out after you die, but did you know it could help you mitigate how much Inheritance Tax (IHT) your estate will be liable for too?
Inheritance Tax
Inheritance Tax receipts continue to rise as frozen thresholds and increasing asset values pull more families into the tax net. HMRC collected £8.2 billion in IHT during the 2024/25 tax year, with further increases expected over the coming years.
With a standard tax rate of 40% once certain thresholds are exceeded, IHT can have a sizeable impact on what you leave behind for loved ones. While only a relatively small percentage of estates pay the tax, more families are now being affected due to long-standing freezes to allowances and changes announced to pension taxation from April 2027.
So, how can a will help you reduce the amount of IHT due?
Make use of the nil-rate bands
Your first step should be to make sure you’re making full use of available nil-rate bands.
All estates can take advantage of the nil-rate band, currently £325,000 for the 2026/27 tax year. No IHT is due if your estate falls below this threshold.
The residence nil-rate band, currently £175,000, can be added if you’re leaving your main home to direct descendants, such as children or grandchildren, although the allowance is reduced for estates worth more than £2 million. As any unused allowance can usually be transferred to a spouse or civil partner, this means a couple may be able to pass on up to £1 million without their estate being liable for IHT if both allowances are fully available.
These thresholds are currently frozen until at least 2030, meaning careful estate planning is becoming increasingly important.
Children and grandchildren may inherit under the rules of intestacy if you die without a will in place. However, making your wishes clear in a will can help ensure assets are distributed in the most tax-efficient way possible.
Establish a trust
Assets placed in some types of trusts may sit outside of your estate for Inheritance Tax purposes.
You can create a trust during your lifetime and leave assets to loved ones through it, or establish certain trusts through your will.
Trusts can be used to reduce tax liabilities and may also help you make provisions for children or vulnerable beneficiaries who may not be able to manage finances independently. However, some trust arrangements can still attract tax charges, and you may no longer be able to benefit from the assets or income once they have been transferred.
Another option is to place a life insurance policy into trust. This won’t reduce the amount of IHT due, but it can provide loved ones with funds to pay the tax bill without needing to sell assets from the estate. If the policy is not written in trust, the payout may form part of your estate and increase the amount of IHT due.
There are many different types of trusts, and some can be complex to set up correctly. Professional advice can help ensure any trust aligns with your wider estate planning goals. For example, some trusts can provide an income during your lifetime, while others can hold assets for children until they reach a chosen age.
It’s important to make sure a trust is the right option before proceeding, as some arrangements can be difficult or impossible to reverse later.
Leave a charitable legacy
You can make a positive impact and reduce your IHT liability by leaving a charitable legacy in your will. There are two ways charitable giving can be tax efficient.
You may leave enough to charity to reduce the taxable value of your estate below the available nil-rate band thresholds. In some cases, this could mean no IHT is due at all.
If you leave 10% or more of your net estate to charity, the rate of IHT applied to the remaining taxable estate falls from 40% to 36%. For some families, this can mean more is ultimately passed on to loved ones while also supporting causes that matter to them.
This can be an effective way to reduce IHT while creating a lasting legacy.
Reducing Inheritance Tax outside of a will
The three options above are not the only ways to reduce IHT. You may also wish to make use of gifting allowances during your lifetime or make regular gifts out of surplus income where appropriate. Provided certain conditions are met, these gifts can fall outside of your estate immediately or after seven years.
Pensions have also traditionally been an effective way to pass on wealth tax-efficiently, as unused pension funds have generally sat outside of the estate for IHT purposes. However, from 6 April 2027, most unused pension funds and certain pension death benefits will be included within the value of an estate for Inheritance Tax purposes.
As a result, reviewing your pension alongside the rest of your estate planning is becoming increasingly important. Updating beneficiary nominations and reviewing how retirement assets are structured could help ensure your plans remain aligned with your wishes.
Is reviewing your will part of your financial plan?
If you don’t already have a will in place, arranging one should be a priority. Without a will, your assets may not be distributed in the way you intended.
Even if you already have a will, reviewing it regularly should form part of your wider financial plan. Your assets, family circumstances and wishes can all change over time, and upcoming changes to pension and inheritance tax rules mean existing plans may no longer be as effective as they once were.
If you’re concerned about IHT or would like to discuss what you could leave behind for loved ones, please contact the George Square team on 0115 947 5545 or send us a message here.