Introduction:
Why IHT planning matters more than ever
Inheritance Tax (IHT) is increasingly becoming a central part of personal tax and financial planning. Over the past decade, many families have seen the value of their assets grow steadily, and at the same time, the core IHT thresholds have been frozen since 2009 and will remain unchanged until at least 2031.
As a result, a larger proportion of family wealth becomes exposed to IHT, often without deliberate action from the individuals involved. This “fiscal drag” means estates that once fell comfortably below the thresholds may now face a substantial IHT charge.
Given that IHT is charged at 40% on assets above available allowances, reviewing your position early - and doing so regularly - is increasingly important.
Effective planning does not rely on complex structures. Instead, it centres on understanding the rules, considering the timing of key decisions, and ensuring that your estate passes in accordance with your intentions, and in the most efficient manner.
Understanding the Core IHT Allowances
The Nil Rate Band (NRB)
The Nil Rate Band (NRB) represents the first £325,000 of value that can be passed on without attracting IHT.
Although the value has remained static since 2009, the NRB remains a powerful tool in estate planning. Importantly, the NRB is transferable between spouses or civil partners, meaning that if any portion of it is unused on the first death, the balance can pass to the surviving spouse. This can provide a combined allowance for married couples of up to £650,000 on second death.
The NRB also plays a crucial role in shaping how lifetime gifts and trust transfers are treated for tax purposes. For example, a gift into trust (known as a Chargeable Lifetime Transfer) uses the NRB and this will only become taxable if the value transferred exceeds this threshold. If a person dies within seven years of making a gift(s), the NRB will apply to the gifts first, with the balance, if any then available in the estate IHT calculation.
Many long-term estate plans use the NRB repeatedly, for example through phased gifting, enabling wealth to move gradually out of the estate in a tax-efficient way.
The Residence Nil Rate Band (RNRB)
The Residence Nil Rate Band (RNRB) provides an additional allowance of up to £175,000 when a qualifying residence is passed to direct descendants (children, grandchildren, stepchildren and other direct lineal descendants).
The RNRB is also transferable between spouses when unused on the first death so when combined with the standard NRB, a couple may pass up to £1 million free of IHT, assuming both allowances are fully available and the property rules are met.
The RNRB, however, is subject to specific conditions. Notably, it tapers once an estate exceeds £2 million, reducing by £1 for every £2 above this threshold. This means that estates above the threshold will lose some or all of this relief. As a result, individuals and families whose assets are near the £2 million mark may find that the structure and timing of lifetime gifts, property ownership, or business transfers can influence whether the allowance remains available.
The RNRB can also apply where an individual has downsized or sold their main residence, provided that assets of equivalent value pass to direct descendants. This ensures that individuals who have moved home later in life do not lose access to the relief.
In practice, the RNRB works best where families review their Wills, ensure the property passes to direct descendants in the appropriate manner, and consider their overall estate value to determine whether the tapering rules may apply and pre-death gifts are needed to optimise the position.
Lifetime Giving and Annual Planning Opportunities
Lifetime gifting remains one of the most accessible and effective ways to reduce IHT exposure. While the timing and intention of gifts can influence the final tax outcome, even smaller, regular gifts can make a meaningful difference over time.
Annual Exemptions & Small Gifts
Every individual can give away £3,000 each tax year without creating an IHT charge.
If this exemption is unused, it can be carried forward for one additional year.
In addition, gifts of up to £250 per recipient per tax year are exempt, provided no other exemptions are applied to the same person.
Gifts from Income
Perhaps the most valuable — and often overlooked — exemption relates to regular gifts made from surplus income. These gifts are immediately outside the estate if they form part of a pattern and do not reduce the donor’s normal standard of living. This relief can be highly effective where an individual has surplus income that would otherwise accumulate within the estate.
To find out more on gifts, read our insight: MHA | Unlock the Value of the Normal Expenditure Out of Income…
Wedding & Civil Partnership Gifts
Gifts in consideration of marriage or civil partnership are exempt within certain limits (£5,000 from a parent, £2,500 from a grandparent, £1,000 from others).
Potentially Exempt Transfers (PETs)
Outright gifts to individuals are classified as PETs and fall outside the estate entirely if the donor survives for seven years.
If death occurs within that period, the gift becomes chargeable, although taper relief may reduce the liability if more than three years have passed.
Consideration is needed if the assets being gifted are liable to capital gains tax.
Chargeable Lifetime Transfers (CLTs)
Gifts into most trusts are treated as CLTs and may attract tax at the time of transfer if the value transferred exceeds the NRB.
If the donor dies within seven years, the gift is recalculated as part of the estate and further IHT may be due depending on the circumstances.
Gifts to Charities
Gifts to registered UK charities, during lifetime or on death, are exempt from IHT and if 10% or more of a person’s estate is left to charity the rate of IHT applicable to the remaining estate is reduced to 36%.
Gifting strategies should be tailored to the individual’s circumstances, taking into account asset types, liquidity needs, and how gifts fit within the broader objectives for wealth transfer. Over time, well-planned gifting can significantly reduce the value of the taxable estate.
It's important to note, CGT can arise on a gift of chargeable assets. Find out more on CGT:
Reliefs for Agricultural and Business Assets
Agricultural Property Relief (APR)
Agricultural Property Relief offers up to 100% relief on the agricultural value of qualifying land, property and buildings used for agriculture. To qualify, the property must meet ownership and occupation conditions — typically two years if the owner farms the land personally, or seven years if let to a third party for agricultural use.
APR applies only to the property’s agricultural value; any development or "hope value" will remain within the estate. Nevertheless, for families with agricultural land or farm businesses, APR can remove substantial value from an IHT calculation, provided the conditions are maintained.
Business Property Relief (BPR)
Business Property Relief can relieve up to 100% of the value of qualifying business assets, including shares in unquoted trading companies or interests in a sole trade or partnership.
To qualify, the business must be wholly or mainly trading (not mainly investment-based), and the relevant property must usually have been owned for at least two years. Additional rules apply to ensure the relief remains available where assets are transferred between family members, replaced, or held within broader business structures.
April 2026 Changes
From 6 April 2025 APR and BPR at 100% is limited to £2.5million of qualifying assets with the excess obtaining only 50% relief which could result in a significant previously unexpected IHT liability.
Reliefs such as APR and BPR require ongoing attention. A change in business activity, ownership structure, or asset mix may affect eligibility.
Considering a Trust
Trusts can play a significant role in estate planning, allowing individuals to pass assets to the next generation in a tax-efficient way, while retaining control over timing, access and protection.
Trusts are often used to:
- provide for children or grandchildren in a managed way
- protect family assets and wealth for future generations
- support beneficiaries who may be financially inexperienced, or minors who are unable to manage their own affairs
- safeguard family assets from external claims or changes in circumstances
- achieve tax efficiency
Most trusts created during a lifetime fall under the Relevant Property Regime, meaning they may incur IHT on the 10-year anniversary and when assets are appointed out of the trust (exit charges).
Trusts are not the only option. In some cases, life insurance written in trust, a structured gifting programme, or investment in assets that may qualify for BPR or APR can be equally effective. The most suitable solution depends on personal objectives, family circumstances and the nature of the assets involved.
Wills, Ownership Structures and Life Insurance
Wills
A well-structured Will remains one of the most effective estate planning tools. It ensures that assets pass according to your wishes.
Without a Will, intestacy rules may distribute assets in ways that are less tax-efficient and may not reflect personal intentions.
Property Ownership
Property ownership also matters. Whether a property is held as joint tenants or tenants in common can affect how it is inherited and how reliefs apply.
Reviewing ownership arrangements periodically can ensure they remain aligned with your planning objectives.
Life Insurance
Life insurance can also play a useful role. Policies written in trust keep proceeds outside the estate and can provide liquidity for beneficiaries — particularly valuable where assets are illiquid, such as property or business interests.
If you are considering life insurance options, speak with an Independent Financial Adviser.
Pensions and Their Role in Estate Planning
Currently pensions sit outside the IHT estate in most circumstances, historically making them one of the most tax-efficient ways to pass on wealth.
However, from 6 April 2027 unused pension funds are due to come within the charge to Inheritance Tax which could significantly increase the IHT liability in estates with large pension funds.
Key Year-End Steps for 2025/26
Taking small, consistent steps each year can significantly improve the long-term IHT position of an estate.
As the 2025/26 tax year-end approaches, consider the following actions:
- Make use of the £3,000 annual exemption and any unused allowance from the previous year.
- Review regular gifts from income to ensure they meet the necessary criteria.
- Assess whether your estate is near the £2 million RNRB taper threshold.
- Revisit your Will, ensuring it remains aligned with your intentions.
- Review asset ownership — jointly held assets, trusts and business interests.
- Check pension nomination forms and death benefit options.
- Review the qualifying status of business and agricultural assets.
- Consider whether lifetime gifts or restructuring would be beneficial.
- Ensure any existing trusts remain compliant and fit for purpose.
Additional Considerations
Several other factors can influence IHT planning and need to be considered too, including:
Gifts with reservation of benefit, where gifted assets remain within the estate if the donor continues to benefit from them.
Pre-Owned Assets Tax (POAT), which may apply where arrangements fall outside the usual gifting rules.
Valuation of assets, particularly unlisted shares and real property, and from 6 April 2026 APR and BPR assets, which can materially impact the IHT calculation.
Debts and liabilities, especially where loans relate to excluded property or assets benefiting from IHT reliefs.
Cross-border assets, where long term non-resident status and double-tax agreements may affect the outcome.
IHT planning is most effective when approached with clarity, foresight and an understanding of the key reliefs and allowances available. As assets continue to grow in value while thresholds remain frozen, the value of a well-considered estate plan becomes increasingly clear.
Whether through simple measures such as updating a Will, making use of annual exemptions, or implementing more structured arrangements like trusts or business relief planning, taking action early can help ensure wealth passes efficiently and in accordance with personal wishes.
Kat McEwan
Tax Director at MHA