Inheritance Tax Planning Strategies

Maximise allowances first: NRB + RNRB

Before exploring complex strategies, ensure you're making full use of the nil rate band (NRB) and residence nil rate band (RNRB). These thresholds can provide up to £1 million of tax-free allowances for married couples and civil partners.

NRB + RNRB Checklist

• Ensure a qualifying home (or downsizing equivalent) passes to direct descendants to use RNRB; consider downsizing addition if the home was sold.
• Keep the estate ≤ £2m where possible to avoid RNRB taper (£1 reduction per £2 over £2m).
• Transfer unused NRB/RNRB between spouses/civil partners to target up to £1m combined thresholds (subject to normal conditions).
• Keep a simple asset map showing home vs non-home assets to line up with RNRB conditions.

Lifetime gifts — efficient ways to give

Making gifts during your lifetime is one of the most effective ways to reduce inheritance tax. Understanding the rules around exemptions and potentially exempt transfers (PETs) is essential for effective planning.

Use exemptions first

• £3,000 annual exemption (1-year carry-forward available if unused)
• £250 small gifts per recipient per year (cannot combine with annual exemption for same person)
• Wedding gifts: child £5,000 / grandchild £2,500 / others £1,000
• Gifts out of income: regular gifts from income that don't reduce your standard of living; keep multi-year income vs expenditure notes

PET basics

Potentially exempt transfers (PETs) are gifts that exceed the annual exemptions. They become fully exempt if you survive seven years after making the gift. PETs are not reported at the time of gift; they are tested on death within 7 years.

Seven-Year Rule Timeline

Years 0-3 after gift40% tax rate

Years 3-4 after gift32% tax rate

Years 4-5 after gift24% tax rate

Years 5-6 after gift16% tax rate

Years 6-7 after gift8% tax rate

After 7 years0% tax rate

Important: Taper reduces tax, not the gift's value, and only applies if failed PETs exceed the nil rate band.

Ordering at death

Failed PETs use the nil rate band first, then the estate. The 14-year effect may arise where a chargeable lifetime transfer (CLT) occurred in the 7 years before a later PET, potentially reducing the nil rate band available to the PET.

Avoid GWR/POAT traps

If you keep benefiting from a gifted asset (e.g., give a home but keep living rent-free), the value can be pulled back into the estate under gift with reservation (GWR) rules or trigger pre-owned asset tax (POAT). Always ensure gifts are genuine and you don't retain any benefit.

Record-keeping

Keep detailed records of all gifts: recipient, date, amount/value, which exemption used, and payment evidence. This documentation is essential for executors when completing IHT forms.

Pensions after April 2027 — rethink the pecking order

From 6 April 2027, most unused defined contribution (DC) pension funds are within the estate for inheritance tax purposes (spouse/civil partner exemptions aside). Death-in-service benefits stay outside IHT.

Planning pivot

• Consider drawing more from pensions (vs ISAs/cash) if IHT exposure would otherwise rise; weigh against income tax outcomes.
• Death before 75: often income-tax-free to beneficiaries
• Death at 75+: taxed at recipient's marginal income tax rate
• Admin: Expect personal representatives to handle reporting/payment for IHT on pension death benefits; beneficiaries may be jointly and severally liable once appointed.

Business and farm succession (rules from April 2026)

From 6 April 2026, business property relief (BPR) and agricultural property relief (APR) share a combined £1,000,000 allowance for the 100% relief rate. Value above that threshold receives 50% relief.

Prioritise the £1m 100% band

Allocate 100%-rate assets (e.g., unquoted trading shares, a business or an interest in a business, qualifying APR assets) into the first £1m where possible.

Know what's 50%

AIM/'not listed' shares → 50% BPR; land/buildings you own but used by your controlled company → often 50% BPR.

Key considerations

• Excepted assets: Surplus cash or non-business assets inside a company can erode BPR — document working-capital needs.
• APR interaction: APR and BPR cannot both cover the same value. Claim APR first on agricultural value, then test any excess for BPR.
• Environmental agreements (from 2025): qualifying land agreements can preserve APR; keep copies of agreements/management plans.

Which ownership form?

How you own assets affects when and how inheritance tax applies. Understanding joint ownership and trust structures is essential for effective planning.

Ownership choices and joint property

• Joint tenants with spouse/civil partner defers RNRB to second death; tenants in common can direct a share to direct descendants at first death (subject to needs/taper).
• Life policies: in trust generally bypass the estate; to estate are included (use IHT410 on reporting pages).
• Joint bank accounts: HMRC may apportion by actual contributions, not automatic 50/50.

Trust Strategies

Trusts can be powerful tools for inheritance tax planning, allowing you to remove assets from your estate while maintaining some control over how they're used.

Discretionary Trusts

Flexible trusts where trustees decide how to distribute assets among beneficiaries.

• Maximum flexibility for trustees
• 20% entry charge on amounts over nil rate band
• 6% periodic charges every 10 years
• Suitable for uncertain future needs

Bare Trusts

Simple trusts where beneficiaries have absolute right to assets at age 18.

• No ongoing trust charges
• Assets belong absolutely to beneficiary
• Income taxed on beneficiary
• Suitable for gifts to children

Charitable Giving Strategy

Charitable gifts can reduce inheritance tax in two ways: they're exempt from inheritance tax, and leaving 10% or more of your net estate to charity reduces the tax rate from 40% to 36%.

Charitable Rate Reduction

Example: £1,000,000 Estate

Without charitable giving:

Taxable estate: £675,000

Tax at 40%: £270,000

Net to beneficiaries: £730,000

With 10% to charity:

Charitable gift: £100,000

Tax at 36%: £194,400

Net to beneficiaries: £705,600

*Assumes £325,000 nil rate band used. Charity receives £100,000, family receives £705,600 vs £730,000.

Paying the tax

Understanding payment deadlines and options can help manage cash flow and reduce interest charges.

Paying IHT

• Due date: by the end of the sixth month after the month of death; interest is daily simple (non-compounding).
• Instalments: Qualifying business/farm/land/residential let property may be payable over 10 annual instalments (interest typically due on balance).
• Payments on account: Consider making payments on account to reduce interest if values are uncertain.

Advanced Strategies

For larger estates, more sophisticated planning techniques may be appropriate. These typically require professional advice and careful implementation.

Loan Schemes

Making loans to family members rather than gifts can provide flexibility while removing future growth from your estate.

• Loan can be written off gradually using annual exemptions
• Future growth belongs to borrower
• Requires proper documentation

Family Investment Companies

Sophisticated structures allowing parents to retain control while transferring future growth to children.

• Parents hold preference shares
• Children receive growth shares
• Requires ongoing management

Planning Considerations

Effective inheritance tax planning requires balancing tax efficiency with practical considerations and family circumstances.

Key Planning Principles

• Start planning early - many strategies require time to be effective
• Don't give away more than you can afford - maintain your lifestyle
• Keep detailed records of all gifts and their values
• Review plans regularly as circumstances and laws change
• Consider the impact on beneficiaries' own tax positions
• Seek professional advice for complex arrangements