Three proactive steps to help your beneficiaries manage an Inheritance Tax bill

You may have planned to pass your estate on tax-efficiently, but have you prepared to help your loved ones pay the Inheritance Tax (IHT) bill?

If IHT is due on your estate, without comprehensive planning, your family could be left scrambling to cover the cost. In some cases, they could have to sell key assets (such as your home) to pay the bill or pay out of their own pockets whilst waiting for probate.

Typically, the executor or administrator of your estate will need to pay any IHT due within six months of your death. Otherwise, interest may be charged for late payment – eroding your loved ones’ inheritance.

By preparing to pay an IHT bill, you could help pass on more of your wealth, whilst alleviating some of the financial and administrative burden placed on your loved ones during an emotional and difficult time.

Read on to explore three steps to help loved ones pay an IHT bill without needing to sell key assets.

1. Calculate your estate’s Inheritance Tax liability

As a first step, you need to understand how much your estate’s IHT bill is likely to be.

Typically, IHT is only due on the portion of your net estate exceeding your nil rate band. As of 2026/27:

• The nil-rate band is £325,000.
• You may also have a residence nil-rate band of up to £175,000 if you leave a primary residence to a direct descendant, depending on the total value of your estate.
• If you’re married or in a civil partnership, any unused nil-rate band typically transfers to the surviving spouse. So, you may be able to pass on up to £1 million as a couple before IHT is due.

Read more: Will you have to pay Inheritance Tax? The rules explained

For assets exceeding your nil-rate band, IHT is usually charged at 40%. However, your rate may be reduced to 36% if you leave 10% or more of your net estate to charity.

You may wish to review your IHT liability when your finances, beneficiaries, or legislation change. Notably, from April 2027, most unused pension pots will be subject to IHT. As such, it may be worth calculating the impact on your IHT bill and ensuring you have enough set aside to cover the full amount.

Once you have evaluated your estate’s IHT bill, you might consider taking steps to mitigate it. For example:

• Gifting assets during your lifetime, using the gifting exemptions and seven-year rule to remove the value from your estate. Read more: Why gifting your wealth could have a greater impact on beneficiaries (and your tax bill).
• Placing assets in trust to reduce their IHT liability or exempt them from the tax completely (more on this later).
• Including charitable donations in your will to reduce your IHT rate, as described above.

By accurately calculating your estate’s IHT liability and keeping the calculations up to date as your circumstances evolve, you can help prepare your finances for your loved ones to pay the bill.

Learn more about how we can support you with Inheritance Tax

2. Take out life assurance to cover the Inheritance Tax bill

Once you understand your estate’s IHT liability, you might consider taking out whole of life cover to help your loved ones pay the bill.

Whole of life cover is a type of life assurance that provides financial protection for the rest of your lifetime, as long as you keep up with premium payments.

Usually, life assurance will pay out a lump sum to your chosen beneficiaries when you pass away. The cover you choose will determine how much they receive. You may be able to amend your coverage mid-policy if your needs change, such as if your IHT liability increases.

Find out how we can support you with protection and insurance

When you’re retired, using your pension to pay the premiums can help reduce the size of your pot, removing the funds from your taxable estate.

Place your life assurance in trust

It’s important to remember that the payout could be considered part of your estate and subject to IHT if it isn’t placed in trust. Your beneficiaries will usually also have to wait until the probate process is completed to access the funds.

Placing your life assurance in trust can mean your beneficiaries receive the lump sum payout directly. As a result, the payout may be exempt from IHT.

What’s more, they could access the funds more quickly, without waiting for probate to be granted. So, they may be able to pay the IHT bill within six months and avoid costly interest charges.

The rules and options for trusts are complex, with some trusts making it difficult to change your beneficiaries. A Financial Planner can help you identify the right trust and cover for your needs and circumstances.

3. Set funds aside in a trust

If you have sufficient cash available in your estate, you might consider setting the funds aside in a trust to cover your estate’s IHT bill.

Depending on the type of trust you use, placing assets in trust removes them from your estate for IHT purposes after 7 years, unless covered by a gifting exemption. In effect, they become the property of the trustee or beneficiary, depending on the type of trust and how it is structured, placing assets in trust may help mitigate Inheritance Tax, but the tax treatment is complex and depends on the trust used and your circumstances.

By doing this, you can help ensure there’s enough cash in your estate to cover the IHT bill and divide your remaining estate between your chosen beneficiaries.

By placing the assets in a trust, rather than a savings account, you could help your loved ones to pay the IHT due on your estate more quickly and easily. As mentioned above, they generally won’t need to wait for probate to access the funds, enabling them to pay the IHT bill within six months.

The tax rules when using trusts are complex, with some trusts charging IHT when assets are transferred in, when they are withdrawn, and on each 10-year anniversary until they are transferred out.

Typically, donors cannot remove assets from a trust once they have transferred them in. To be effective for IHT purposes, the settlors must be excluded from benefitting from the trust funds. Once assets have been transferred into a trust, it may be difficult to reverse the decision, depending on the trust used. So, it’s important to consult a Financial Planner for guidance on whether a trust is suitable for you and which type may be most appropriate for your needs.

Get in touch

If you’re thinking about preparing to pay your IHT bill, get in touch to find out how our Financial Planners can help you define an effective strategy tailored to you.

Email us at enquiries@pen-life.co.uk or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.