Part 2: Inheritance tax planning in a world of frozen thresholds | Wealthtime

Kylie Clark, Customer Experience Director, Wealthtime, brings you the second in a 3-part mini series on the new tax year. This second instalment looks at how frozen tax thresholds are forcing more estates above the inheritance tax (IHT) brackets.

Frozen tax thresholds and rising asset values are bringing more estates into the inheritance tax net. HMRC data shows 31,500 estates paid inheritance tax in 2022–23, up 13% on the previous year. IHT receipts reached £8.2bn in the 2024/25 tax year, up from £7.5bn the previous year, according to Government figures highlighting how quickly the tax is expanding as asset values rise.

With the inheritance tax nil rate band and residence nil rate band frozen at £325,000 and £175,000 respectively until at least April 2030, and property and investment values rising over time, the number of estates exceeding these limits is likely to increase. As we move into the 2025/26 tax year, these dynamics remain firmly in place.  In fact, the Office for Budget Responsibility expects inheritance tax receipts to rise by more than 50%, from around £9bn a year today to more than £14bn by the end of the decade.

This growing exposure comes at a time when many clients feel uncertain about tax planning. Wealthtime research with Ad Lucem shows 32% of advice-engaged investors with £50k+ investable assets feel anxious about the process, while 47% say uncertainty around tax rules and allowances is one of their biggest concerns.

This has practical implications for advisers, reinforcing the value of clear planning discussions and encouraging earlier estate planning conversations so strategies can be implemented gradually rather than reactively.

The role of familiar exemptions

The core inheritance tax exemptions remain an important foundation for planning. The £3,000 annual exemption, the £250 small gifts exemption and the normal expenditure out of income exemption can all help slow the growth of an estate when used consistently.

For clients with stable and predictable income, regular gifts from surplus income can be particularly effective. Where the payments are genuinely made from excess income and do not affect the donor’s standard of living, they leave the estate immediately rather than after seven years. In practice, these arrangements often work alongside life assurance written in trust. Premiums funded from surplus income can fall within the same exemption while creating liquidity to meet a future inheritance tax liability.

For many clients, however, these allowances form only the starting point of a broader planning approach.

One area where advice has become more nuanced is the interaction between inheritance tax and capital gains tax.

Lifetime gifts of chargeable assets are normally treated as disposals at market value for capital gains tax purposes. A gift of a property or investment that has risen in value may therefore create an immediate capital gains tax charge. For assets with significant unrealised gains, this creates a trade-off between reducing inheritance tax exposure and triggering a capital gains tax liability.

By contrast, assets passing on death benefit from a capital gains tax uplift. Gains that have built up during the deceased’s lifetime are effectively wiped out and beneficiaries inherit the asset at its probate value.

This means the decision to gift assets during lifetime is rarely straightforward. Advisers increasingly consider both taxes together as part of broader estate planning discussions.

Control and client behaviour

Tax efficiency is only one element of inheritance tax planning. Client comfort with loss of control often shapes the strategy, with behavioural considerations increasingly influencing planning decisions as much as the technical rules.

Outright gifts to individuals remain the simplest option where affordability is clear. These transfers are treated as potentially exempt transfers and fall outside the estate after seven years, although ensuring clients retain enough money in later life means giving away significant capital early doesn’t always make sense.

Discretionary trusts can allow assets to be removed from the estate while retaining control over how funds are distributed, although suitability depends heavily on individual circumstances. However, transfers above the available nil rate band may trigger an immediate inheritance tax charge and ongoing trust charges must also be considered.

Business Relief has traditionally been used to reduce inheritance tax exposure while retaining access to capital. However, changes announced in the October 2024 Budget will reshape its role. From April 2026, a £1 million cap will apply to assets qualifying for 100% relief, with any excess receiving 50% relief instead. Qualifying quoted but unlisted shares will only qualify for 50% relief. This changes the calculation when considering Business Relief, requiring advisers to weigh the potential tax benefit against the higher investment risk and liquidity constraints that often accompany these assets as part of a regulated advice process.

The start of a new tax year provides a useful checkpoint remains a useful checkpoint for reviewing estate planning strategies and gifting activity. But the most effective inheritance tax planning rarely happens in a single tax year. It develops gradually through consistent gifting, careful sequencing and an understanding of how different taxes interact, guided by professional advice over time.

All three parts are now available on the website, so be sure to check out Part 1 and Part 3!

About Kylie Clark

Kylie joined Wealthtime in April 2025 as Senior Operations Consultant, moving into the role of Customer Experience Director in October 2025. A strategic and operational leader with over 20 years of experience in wealth platforms, she brings with her a deep understanding of both adviser and customer needs, transformation readiness, and regulatory compliance.