Estate Tax Planning Guide: How to Reduce Estate Taxes

What is estate tax planning?

As the saying goes, ‘only two things are certain: death and taxes’. But even after death, taxes can still apply unless you plan ahead.

Estate tax planning is the process of arranging your assets, income, and legal affairs to reduce estate and inheritance taxes when passing on wealth after death.

It focuses on:

• Reducing the tax burden on your estate
• Ensuring assets pass efficiently to beneficiaries
• Aligning tax outcomes with personal and family goals

There are several estate taxes to consider, but most people focus on Inheritance Tax planning and long-term tax efficiency.

Why estate tax planning is essential

Taxes can reduce the value of your estate. Without proper planning, you may have less to leave your loved ones. Sometimes, heirs might even need to sell assets to pay taxes.

Effective estate tax planning can help you:

• Preserve family wealth across generations
• Provide certainty for beneficiaries
• Avoid unnecessary tax exposure
• Make estate administration easier

Estate planning is especially important for high-net-worth individuals or those with international assets.

Estate taxes explained

Depending on your circumstances, an estate may be subject to:

• Inheritance Tax (IHT)
• Capital Gains Tax (CGT) on certain assets
• Income Tax

Inheritance Tax

Inheritance Tax (IHT) is a tax on a person’s estate, including property, savings, and other possessions.

Capital Gains Tax

You pay Capital Gains Tax (CGT) on any profit made when selling an asset that has increased in value. CGT only applies if assets from the estate are sold and:

• They have gone up in value since the person died
• They have gone up in value since initially being valued for Inheritance Tax

If you transfer assets to beneficiaries without selling them, CGT does not always apply. It is best to speak to an expert who can advise based on your circumstances.

Income Tax

Income Tax is paid on earnings made between the date of death and when the estate is settled. This period is called the administration period. The income tax rates are:

• Dividend payments: 8.75%
• Any other income: 20%

If the estate’s income is more than £500, it must be reported to HMRC.

Not every estate will face all these taxes, but understanding the full picture is important for effective tax and estate planning.

How inheritance tax is calculated

Inheritance tax is the most common tax levied on estates. It is based on the value of your assets at the time of your death. This may include:

• Property and real estate
• Investments and savings
• Business interests
• Personal assets of value
• Life insurance

The Inheritance Tax threshold, also known as the Nil Rate Band (NRB), is currently £325,000 per person. The Residence Nil Rate Band (RNRB) can raise this to £500,000 if you leave your home to your children or grandchildren.

When someone dies, any unused Nil Rate Band and Residence Nil Rate Band can be passed to their surviving partner. If the whole estate goes to the partner, their IHT threshold could rise to £1 million

You can only transfer your threshold if:

• You were married or in a civil partnership at the time of the first death
• You send the request to HMRC within 2 years of the death of the surviving spouse or civil partner

You are taxed at a rate of 40% for any assets that exceed the thresholds. Below are two real-world examples using a £2 million estate that includes property, assuming no IHT threshold has been inherited.

If the property is left to a direct descendant (RNRB applies)

• Portion of estate that IHT is charged on: £1,500,000 (£2 million - £500,000 threshold)
• Tax payable: £600,000 (40% of £1,500,000)

If the property is not left to a direct descendant (RNRB does not apply)

• Portion of estate that IHT charged: £1,675,000 (£2 million - £325,000 threshold)
• Tax payable: £670,000 (40% of £1,675,000)

Inheritance Tax can reduce the value of your estate. For large estates, planning can help lower the tax owed, so you can leave more to your loved ones.

Try our calculator to estimate how much Inheritance Tax may be due on your estate.

Who needs estate tax planning?

Anyone can benefit from estate planning, but it is especially important for:

• High-net-worth individuals
• Business owners
• Families with property or investment
• Individuals with assets in more than one country

Estate tax planning for international families

International estate tax planning is more complex because each country has its own tax rules. Without careful planning, your assets could face double taxation or unexpected inheritance tax bills.

Read our guide to international estate planning to learn more.

How to reduce estate taxes legally

There is no single way to reduce estate taxes, but common strategies include:

• Lifetime gifting
• Using trusts effectively
• Structuring assets and investments tax-efficientl
• Making use of available reliefs and exemptions

Lifetime gifting strategies

Giving away assets during your lifetime can lower the amount of Inheritance Tax (IHT) due on your estate. However, you should plan gifts carefully to avoid unexpected tax consequences.

You can give away a total of £3,000 worth of gifts each tax year to one person or split it between several people. You can also gift up to £250 as many times as you want each tax year, as long as you haven’t used another allowance on that person.

If someone is getting married, you can give:

• To a child: £5,000
• To a grandchild or great-grandchild: £2,500
• To any other person: £1,000

What if you want to give more than these amounts?

A Potentially Exempt Transfer (PET) allows you to gift an unlimited amount to another person or trust. Be aware that PETs must meet certain conditions.

Timing matters when giving gifts. If you die within 7 years of making a gift, it may be taxed on a sliding scale called Taper Relief. The tax rate ranges from 8% to 40%, depending on how many years have passed between the gift and your death.

One powerful yet often overlooked form of relief is giving away surplus income. This lets you give more than the usual gift limits without paying IHT, and it also avoids the ‘seven-year rule’ mentioned earlier.

For gifts to qualify, they must:

• Be made from your normal income, not capital
• Not affect your normal living standards after giving the gift
• Be made on a regular basis (one-off gifts would not qualify)

Visit the UK government website to learn more about the rules on giving gifts.

Trusts

Trusts are commonly used in inheritance tax planning. When set up properly, they can:

• Remove assets from an estate
• Help estates avoid probate
• Reduce Inheritance Tax on an estate
• Protect beneficiaries
• Control how and when assets are distributed

There are several different types of trusts, but most are either revocable or irrevocable.

Irrevocable trusts offer more Inheritance Tax planning benefits. Assets placed in an irrevocable trust are no longer owned by you, so they do not count towards your taxable estate.

The best trust structure depends on your family's needs, the types of assets you have, and the level of control you want over your assets. To learn more, read our guide to trusts.

Allowances and reliefs

How assets are owned or passed on can greatly affect Inheritance Tax liabilities. Some key Inheritance Tax allowances and reliefs include:

Charitable donations

Any assets left to a charity are exempt from IHT. Leaving 10% of your net estate to charity can also reduce the IHT rate from 40% to 36%.

Spouse or civil partner exemption

Married couples and civil partners don’t pay Inheritance Tax if they leave their estate to their surviving partner. They can also pass on any unused tax-free allowance, including the Nil Rate

Band and Residence Nil Rate Band. This means the surviving partner could have an IHT threshold of up to £1 million.

Business Relief

Business owners can receive tax relief of 50% to 100%, provided they meet certain criteria.

Business tax planning for business owners

Inheritance Tax planning is important for business owners, as they often face unique estate tax challenges.

Effective strategies may include:

• Succession planning
• Taking advantage of tax reliefs

Business Relief can help reduce Inheritance Tax by lowering the value of a company you own or its assets, provided they have been held for at least two years before you die.

If you qualify, you can claim either 100% or 50% tax relief, depending on the type of business and how you own it.

Estate tax planning helps make sure the business can continue smoothly. To learn more, read our guide to estate planning for business owners.

Secure your legacy with expert estate tax planning

Estate tax planning helps protect your wealth, so you can pass more on to your loved ones.

By planning ahead and taking the right steps, you can reduce estate taxes legally and create a lasting legacy for future generations.

Holborn Assets offers a range of estate planning services tailored to your needs and goals. Talk to our experts to get the advice you need to secure your legacy.