Inheritance Tax Planning – Protecting Your Estate

Inheritance Tax (IHT) is a growing concern for families, homeowners, and business owners looking to pass on their wealth efficiently.

With new changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) taking effect in April 2026, and further changes to IHT and unspent pensions in 2027, estate planning is becoming more important. 

However, IHT planning is about more than just APR and BPR – understanding nil-rate bands, gifting rules, and trust structures can help you reduce or even eliminate unnecessary tax liabilities.

How does inheritance tax work?

Currently, IHT is charged at 40 per cent on estates valued above £325,000 (the standard nil-rate band).

However, there are various reliefs and exemptions available to help minimise the tax burden. These include:

Nil-rate bands – Everyone has a £325,000 tax-free allowance, with an additional £175,000 residence nil-rate band (RNRB) if passing on their main home to direct descendants. This means that each individual can pass on up to £500,000 or pass their threshold to their spouse so that couples can leave an inheritance of up to £1 million tax-free. These rates are currently frozen until 2030, so planning is essential as the costs of assets rise.
Gifting rules – Gifts made more than seven years before death are generally exempt from IHT. Gifts out of regular income, such as paying for the cost of private schooling for a grandchild are also exempt. 
Trusts – Trusts can help to control how assets are distributed while potentially reducing IHT liability.
Business and Agricultural Property Reliefs – From April 2026, full relief will be capped at £1 million per individual, with only 50 per cent relief available on excess value.

How to reduce your IHT liability

If your estate could exceed the tax-free thresholds, there are several strategies to mitigate the impact of IHT.

1. Make use of nil-rate bands

• Married couples and civil partners can pass assets tax-free to each other and transfer any unused nil-rate band to their spouse, potentially shielding up to £1 million from IHT.
• Ensure your residence nil-rate band is maximised by passing your home to children or grandchildren.

2. Use gifting allowances

• You can gift £3,000 tax-free each year (£6,000 if no gift was made in the previous tax year).
• Wedding gifts, small gifts, and regular gifts from excess income can also be exempt.
• Larger gifts may also be free from IHT if you survive for seven years, as they fall outside your estate for IHT purposes.

3. Consider trusts for wealth protection

• Trusts allow you to pass assets down generations while keeping control over how they are used.
• Certain trusts may reduce IHT liability if structured correctly.
• Trusts can be useful for protecting assets for children or vulnerable beneficiaries as well.

4. Review your estate’s liquidity

• From April 2026, IHT on assets not covered by APR or BPR will need to be paid in 10 equal instalments.
• Ensure that your estate has sufficient cash or liquid assets to cover potential tax bills.
• If necessary, gradual asset disposal may be an option to ease the financial burden on beneficiaries.

5. Update your will and succession plans

• Having an up-to-date will ensures your assets are distributed as intended while taking advantage of tax-efficient planning.
• If you own a family business or farm, a structured succession plan can help reduce tax exposure and ensure a smooth transition.

Take action now to protect your estate

With significant changes to IHT on the horizon, now is the ideal time to review your IHT planning strategy.

By managing your estate, you can ensure that more of your wealth goes to your loved ones. If you would like assistance reviewing your estate in light of the changes to IHT, please get in touch.