Picture this. You work hard your entire lifetime to provide the funds you and your family need to live your desired lifestyle and reach your goals. But then, even though you’ve paid Income Tax your entire life, the government announces that it’s going to take a further 40% of your wealth away.
That’s effectively how Inheritance Tax (IHT) works, charged at 40% on assets you pass on in excess of certain thresholds.
And with IHT receipts rising, the portion you can pass on to the next generation tax-efficiently may be shrinking. Indeed, the Office for Budget Responsibility forecasts that IHT receipts could reach £9.1 billion in 2025/26, rising to £14.3 billion by 2029/30.
But your wealth may not only be subject to IHT once. As assets are handed down from one generation to the next, they could be taxed multiple times. As a result, younger generations may receive far less than you had intended.
To reduce the repeated taxation of your wealth, you might consider leaving a larger portion directly to your grandchildren, rather than your children.
The idea of “disinheriting” your children might seem unthinkable. However, in some circumstances, they might be thankful you’re taking steps to minimise the IHT charged on your family’s intergenerational wealth.
If you’re curious about the potential pros and cons of skipping a generation in your will, and your alternative tax-efficient options for passing on your wealth, read on.
Your estate’s Inheritance Tax liability could be rising
Typically, the initial portion of your estate can be passed on without being subject to IHT. This is known as the “nil-rate band”, which stands at £325,000 in 2025/26. Additionally, when direct descendants inherit your primary residence, you can benefit from the residence nil-rate band of up to £175,000 in 2025/26.
However, the nil-rate band has been frozen since 2009, while the residence nil-rate band hasn’t changed since 2017. As of 2025/26, these thresholds are expected to remain frozen until 2029/30.
This is bringing more estates into the IHT net, and many estates already liable for IHT are seeing their tax bills rise. According to MoneyWeek, if these thresholds had risen with inflation, in 2025 the nil-rate band would have grown to £517,007, while the residence nil-rate band would have been £221,633.
As a result, you would be able to pass on up to an additional £238,640 tax-free.
You may be able to pass on more wealth by skipping a generation
The impact of rising IHT receipts can become more pronounced when you consider that your wealth could be subject to IHT more than once.
For example, let’s say you’re single and leave a total of £1 million in assets to your child, including a primary residence worth over £175,000:
- £500,000 could be passed on tax-free through the nil-rate bands.
- Assuming you take no other IHT-mitigating measures, the remaining £500,000 is subject to IHT at 40%, leaving £300,000.
- Your beneficiary receives a total of £800,000.
Now, imagine that your child already has assets exceeding the nil-rate bands before factoring in the £800,000 from your estate.
- When they pass away, the £800,000 is taxed again at 40%.
- Your grandchildren receive £480,000 of your wealth, while HMRC has received £520,000.
However, if you were to leave your full estate to your grandchildren, bypassing your children, they would receive £800,000. So, if your child does not plan on using their inheritance and is likely to pass it on, they might thank you for ensuring your grandchildren receive a larger amount.
Of course, this hypothetical scenario assumes you only have one child and that they save the full inheritance from your estate to pass to your grandchildren. Your actual circumstances are likely to vary, depending on your family’s dynamics and financial situation.
Having honest conversations with your family can help determine the most appropriate way to pass on your wealth
While in some cases bypassing your children in your will could help ensure more of your wealth is passed to your descendants rather than HMRC, it won’t be a suitable choice for everyone.
For instance, if your child is relying on receiving an inheritance for their financial security, leaving them out of your will could be detrimental to their future. In fact, MoneyAge reports that around one in three people are counting on an inheritance to fund their retirement.
By having an open, honest conversation with your family, you can agree on the most appropriate strategy for passing on your wealth. Although you may find talking about inheritance uncomfortable, developing an estate plan tailored to the needs of your children and grandchildren, while keeping tax efficiency in mind, could be hugely beneficial for your loved ones.
What’s more, while your child might be grateful that you’ve taken steps to secure your grandchildren’s financial future, speaking with your family about their inheritance can help avoid any surprises after you pass away. You want to leave a legacy of financial stability, not disputes, and being open and honest about your will could help avoid confusion and disagreements further down the line.
Gifting could help you pass on wealth, while mitigating your estate’s Inheritance Tax bill
Regardless of who you intend to leave your estate to, you’ll want to find tax-efficient ways to pass on your wealth. With careful gifting, you may be able to transfer financial assets in your lifetime without attracting an IHT bill.
Provided you don’t pass away within seven years of making a gift, as of 2025/26 you can generally give away an unlimited amount of your wealth without the value being included in your estate for IHT. Should you die within those seven years, your gift may be subject to IHT at a tapered rate.
That said, if you want to be sure your gifts won’t be included in your estate, regardless of when you die, you might consider using one of the following annual allowances or exemptions in 2025/26:
- Annual exemption: You can usually give a total of £3,000 a year without it being included in your estate when you pass away.
- Small gift allowance: Provided you haven’t used your other allowances on the same person, you can typically give an unlimited number of gifts of up to £250 per person.
- Wedding gift allowance: Gifts made on marriage or civil partnership can be exempt from IHT. Typically, you can give up to £5,000 to your child, £2,500 to your grandchild or great-grandchild, or £1,000 to anyone else.
- Regular gifts from income: You can usually give unlimited regular gifts out of your income, provided you can afford the payments out of your regular monthly income after meeting your usual living costs.
By using these allowances, you could pass on a substantial portion of your wealth over a number of years without risking a future IHT bill. So, you could prevent some assets from being subject to IHT across multiple generations.
Get in touch
For support with tax-efficient estate planning, email help@fourseasonsfp.co.uk or call us on +44 (0) 13724 04417
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients 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, or will writing.
