Inheritance Tax Planning at the Start of the Year: Small Steps That Can Make a Big Difference

The start of a new year is often a time for reflection and organisation. One area that regularly gets pushed down the list, however, is inheritance tax planning.

Inheritance tax is not only a concern for the very wealthy. With rising property values and more complex family arrangements, inheritance tax affects far more estates than many expect. The good news is that early, considered, planning can make a significant difference without major changes or complicated arrangements.

This blog article explains why the start of the year is an ideal time to review your position and highlights some straightforward opportunities that are sometimes overlooked.

Inheritance tax planning is rarely best left until the last minute. Several valuable reliefs require time to take effect. Acting early in the tax year gives you:

• A full year to use annual exemptions
• Time to think through gifting strategies
• Scope to align tax planning with your broader estate planning
• Peace of mind that you’ve taken control rather than leaving matters for later

Good planning doesn’t have to be complicated; It’s about practical, common sense decisions made over time.

Inheritance tax is charged at 40% on the value of an estate above the available allowances.

Most people benefit from:

• A £325,000 nil rate band, and
• A possible £175,000 residence nil rate band, if a qualifying home passes to direct descendants

These allowances can often be transferred between spouses or civil partners. Even so, property values and investments can quickly push an estate above the thresholds, resulting in an inheritance tax charge that could have been reduced, or possibly avoided altogether, with advance planning.

Historically, pension funds have usually fallen outside inheritance tax. From April 2027, however, unused pension funds and certain pension death benefits will be brought into account.

For many people, pensions are among their largest assets. Including these funds within the estate could:

• Push an estate into a taxable position for the first time, or
• Increase the tax payable where the estate is already taxable

This shift makes early review essential. Assumptions that pensions will be free of inheritance tax may no longer be correct, and existing plans may need updating.

One of the simplest planning tools is to use your annual exemption for gifts. Everyone can give away up to £3,000 per tax year.  If last year’s allowance was unused, it can be carried forward once, allowing a gift of up to £6,000. This simple exemption could save up to £2,400 in Inheritance Tax in the first year alone.

In addition to the annual gift allowances everyone can make:

• Gifts of up to £250 per recipient
• Wedding or civil partnership gifts (within specific limits)
• Gifts to charities, which are fully exempt and may reduce the overall tax rate

The start of the year is an ideal time to plan these gifts rather than making rushed decisions at the end of the tax year.

Regular gifts from surplus income is an inheritance tax allowance that is often missed but can be extremely effective. When the conditions are met, these gifts immediately fall outside the estate for Inheritance Tax purposes.

Examples might include:

• Monthly contributions towards your children or grandchildren
• Insurance premiums paid for someone else’s benefit

To qualify, these gifts take a little planning. They must come from income, be part of a settled pattern and leave enough income for you to maintain your usual lifestyle. 

Reviewing income and expenditure at the beginning of the year makes it easier to evidence and implement this exemption correctly.

Larger gifts can also become exempt if you survive seven years. The key points to remember are:

• The seven-year period starts on the day the gift is made
• Delaying a gift simply delays the start of the seven-year clock
• Even if you don’t survive for 7 years ‘taper relief’ may reduce tax after three years

If larger gifts are appropriate, early planning provides far greater certainty. The New Year is a sensible time to consider affordability and long term aims.

Tax planning should always support, and not drive, your overall goals and personal wishes. In short, “Don’t let the tax tail wag the dog.”

A short review at the start of the year helps ensure:

• Your Will still reflects your wishes
• Assets pass in a tax efficient way
• Arrangements for blended families, second marriages or vulnerable beneficiaries are appropriate
• Any existing trusts remain suitable

Minor changes can have a significant impact on both the tax position and the practical administration of an estate.

Estate and Inheritance tax planning is not a “once and done” exercise. Legislation changes, asset values fluctuate and family circumstances evolve. A plan that worked years ago may now be less effective.

Taking small, considered steps, especially early in the year, can be one of the best ways to manage future tax liability.

Inheritance tax and estate planning does not need to feel daunting. By understanding the allowances available and reviewing your position regularly, you can take control of the outcome.

With pension assets soon forming a larger part of the calculation, a proactive review is now more important than ever.

Professional advice ensures that planning reflects your circumstances, wishes and is implemented correctly.

If you would like to review your estate planning, inheritance tax position, discuss the impact of the upcoming pension changes or ensure your current arrangements remain suitable, please contact me for tailored advice. Please be advised that this blog shares general advice, and is not specific tax advice.