4 creative ways to leave an inheritance

We all want to leave a legacy for our loved ones. Without careful planning, taxes can get in the way - especially inheritance tax (IHT), causing delays, distribution mistakes or needless erosion to the wealth we hope to pass down.

Fortunately, the UK tax system still allows individuals to structure their assets in strategic (often creative) ways. The result can be greater peace of mind in life and lower wealth-related taxes in death. Below, our Grantham financial planners offer four creative (yet practical) ideas to leave an inheritance in 2025.

#1 Life Insurance Held in Trust

Many people assume life insurance is mainly to support a bereaved family in the event of the policyholder’s death. However, when held in a trust, it can also be a valuable tool in estate planning - potentially settling an IHT bill:

• The lump sum can be paid directly to trustees, who could then distribute it fairly quickly (bypassing the probate process).
• The payout can sit outside of the estate - potentially avoiding IHT.
• Money can quickly be made available to settle taxes, debts and expenses when administering the estate.

This is a complex area, and seeking financial advice is essential to navigate it properly. For instance, you should be confident that the total premiums you could pay for a life insurance policy will be lower than a future IHT bill.

#2 Charitable Legacy with Family Involvement

Did you know that the standard rate of IHT in 2025-26 is 40% - but, if you leave at least 10% of your net estate to charity, the rate lowers to 36%?

For instance, suppose you leave a £1m estate when you die. Assuming no allowances apart from the Nil Rate Band, the IHT bill could stand at £270,000 (£675,000 x 0.4). However, if you gifted £100,000 to charity, your remaining estate (£900,000 minus the Nil Rate Band) would face an IHT rate of 36%.

In this case, your IHT bill would be lower at £230,000, and you would have given to some good causes. With structured family involvement (e.g. a family charitable trust or foundation), this can be even more meaningful - embedding shared values and giving heirs a sense of stewardship.

#3 Phased Gifting

Many people assume that wealth has to be passed down “all at once” upon the owner’s death. However, another option is to use gifting rules to engage in a phased distribution.

There can be IHT benefits to doing this. For instance, the 7-Year Rule allows someone to pass down a large gift without paying IHT on it (provided they survive another 7 years from the date of the gift). Moreover, the Annual Exemption lets you give away up to £3,000 per year, IHT-free.

A more advanced approach to this is the Family Investment Company (FIC). Here, family members (e.g. parents and children) hold shares in a private company together. Founders can then transfer wealth into the company, which sits outside of their estate for IHT purposes (subject to the 7-Year Rule).

A “growth and freezer share structure” could also be used to separate the current value of the company's assets from any future growth. This, again, is quite a complex area involving the amendment of articles of association to create two classes of shares.

The primary purpose in doing so is to shift future growth to the next generation - potentially removing a large portion of the family’s wealth from the founder’s estate (thus mitigating IHT).

#4 Regular Gifts Out of Surplus Income

This is a little-used IHT exemption that holds tremendous power. The core idea is this:

• An individual can make regular gifts to someone (e.g. an adult child) out of their extra income.
• Provided these gifts do not erode the bestower’s standard of living, they can qualify for immediate IHT exemption.
• This allows you to give as much as you can reasonably afford, without affecting your Annual Exemption or Nil Rate Band.

This may be especially useful to higher earners - e.g. retired people with a very generous final salary pension that more than covers their lifestyle needs. Common usages include using the regular gifts to:

• Help fund private school or university fees for grandchildren.
• Fund the premiums on a whole-of-life policy (written in trust).
• Transfers into Junior ISAs, SIPPs or investment accounts for children/grandchildren.

Invitation

IHT is a complex area (as you can see!). Here at Castlegate, our Grantham financial planners are on hand to help you navigate it confidently in light of your goals, needs and situation.

If you’d like to ensure you’re taking the right steps to protect your family wealth and safeguard your financial future, please get in touch.

Your capital is at risk. Investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Diversification does not guarantee profits or fully protect against losses. Tax treatment depends on individual circumstances and may change in the future. This content is for information only and does not constitute personal financial advice. Readers should seek independent financial advice before making any investment decisions.