Inheritance tax planning is crucial for understanding what may form part of your estate, how the available allowances and reliefs apply, and whether the arrangements you have made still reflect your wishes. This planning can cover your will, lifetime gifts, trusts, pensions, charitable legacies, and succession planning for a business or farm. Each element has its own rules, and the most effective estate plans consider how they interact.
This guide provides a high-level overview of inheritance tax, trusts, and estate planning in the UK. Every individual case is unique, and the right approach will depend on your assets, family circumstances, objectives, and tax position. If you are seeking specialist guidance, please get in touch with the HB&O Inheritance Tax, Trusts and Estates team.
Inheritance tax planning essentials
Inheritance Tax (IHT) is generally charged on the value of a person’s estate when they die. An estate can include property, money, investments, possessions, and certain gifts made during the person’s lifetime. The starting point is to establish the value of the assets, deduct qualifying debts and liabilities, and then consider exemptions, allowances, and reliefs.
The standard rate of IHT is 40%, which applies only to the part of the taxable estate that remains above the available thresholds after exemptions and reliefs have been taken into account. Transfers to a spouse or civil partner are generally exempt, as are gifts to qualifying charities.
The nil-rate band
The nil-rate band is the basic IHT threshold available to an individual. It is currently £325,000 and is available against all types of assets in the estate. The government has confirmed that the nil-rate band will remain fixed at £325,000 for the tax years up to and including 2030 to 2031.
If a spouse or civil partner dies without using all of their nil-rate band, the unused percentage can usually be transferred to the survivor’s estate. This can increase the survivor’s nil-rate band to as much as £650,000 if the first person used none of their allowance. The transfer is based on the unused percentage, rather than the cash amount that applied at the first death, and must be claimed when the survivor dies.
The residence nil-rate band
The residence nil-rate band (RNRB) can provide an additional allowance where a qualifying home, or a share of it, passes to direct descendants. Direct descendants can include children, grandchildren, stepchildren, adopted children, foster children, and their spouses or civil partners. The maximum RNRB is currently £175,000 and is also frozen through the 2030 to 2031 tax year.
The RNRB is limited by the value of the qualifying residence passing to direct descendants. It begins to taper away when the net estate exceeds £2 million, reducing by £1 for every £2 above that threshold. Any unused percentage may generally be transferred between spouses or civil partners, potentially allowing a qualifying couple to pass on up to £1 million without IHT where both full nil-rate bands and residence nil-rate bands remain available. Importantly though, the £1 million figure is not an automatic allowance for every married couple or civil partnership. It depends on the home, the size of the estate, the allowances used on the first death, and any relevant lifetime gifts.
Lifetime gifting and the seven-year rule
Lifetime gifting can transfer wealth earlier and, in suitable circumstances, reduce the value exposed to IHT. However, the tax treatment depends on who receives the gift, whether an exemption applies, whether the donor continues to benefit from the asset, and when the donor passes away.
Most outright gifts, which are transferred without condition from one individual to another, are potentially exempt transfers. If the donor survives for seven years after making the gift, it normally falls outside their estate for IHT purposes. If the donor dies within seven years, the gift uses the nil-rate band before the assets remaining in the estate, and tax may become payable if the cumulative chargeable gifts exceed the available threshold.
The seven-year rule does not mean that every gift becomes gradually tax-free from the day it is made, as lifetime gifts are allocated against the IHT nil-rate band in strict chronological order (oldest first). Taper relief reduces the tax charged on a gift, rather than reducing the value of the gift itself. It applies only where tax is due on gifts made more than three years, but less than seven years, before death, and where the combined gifts exceed the available nil-rate band.
Certain gifts are exempt without waiting seven years. These include a £3,000 annual exemption, small gifts of up to £250 per recipient where another allowance has not been used for that person, and specified wedding or civil partnership gifts. The annual exemption can be carried forward by one tax year if unused.
Gifts out of surplus income
The normal expenditure out of income exemption can be valuable, as qualifying gifts are immediately exempt from IHT and there is no fixed monetary cap. The gifts must form part of the donor’s normal expenditure, be made from income, and leave the donor with enough income to maintain their usual standard of living. Regular payments towards another person’s living costs, savings, or pension contributions may qualify where the conditions are met. Evidence for this is critical. HMRC asks for details of income, expenditure, and gifts where the exemption is claimed, so bank statements, schedules, and a clear payment history can help personal representatives support a later claim.
Gifting also requires practical care. A person who gives away an asset but continues to use or enjoy it may create a gift with reservation of benefit, which can leave the market value of that asset within their estate. Giving a home to a child while continuing to live there rent-free is a common example of how a retained benefit prevents a gift from leaving an estate for IHT purposes. Furthermore, a lifetime gift may also have Capital Gains Tax, cash-flow, control, care-fee, or family consequences, so IHT should not be considered in isolation.
Trusts and their role in estate planning
A trust is a legal arrangement under which trustees manage assets for one or more beneficiaries. The person creating the trust is the settlor. The trustees legally hold and administer the assets, and the beneficiaries may receive income, capital, or another defined benefit (e.g., a right of occupation).
Trusts can help to control when and how wealth is used, protect assets for young or vulnerable beneficiaries, provide for a spouse while preserving capital for the next generation, and support succession across a complex family structure. They do not automatically remove assets from the IHT regime. Depending on the type of trust, tax may arise when assets enter the trust, at ten-year anniversaries, when capital leaves the trust, or when a beneficiary (life tenant) dies and the trust assets form part of their estate.
Discretionary trusts
In a discretionary trust, the trustees decide which beneficiaries receive income or capital, when they receive it, and how much they receive. No beneficiary has an automatic right to a particular part of the fund. This flexibility can help where future needs are uncertain, beneficiaries are young, or trustees may need to adapt to changing circumstances. However, most discretionary trusts fall within the relevant property regime and may face IHT when assets enter the trust, on each ten-year anniversary, and when assets leave.
Read our recent article on tax reform and discretionary trusts, which considers the changing tax environment in more detail.
Interest in possession trusts
An interest in possession trust gives a beneficiary a current right to the trust income as it arises, after expenses, or sometimes a right to use trust property. The capital may ultimately pass to somebody else. A common will structure might allow a surviving spouse to receive income or occupy a home for life, with the underlying capital then passing to children.
The IHT treatment depends on when and how the trust was created. Certain qualifying interests, including an immediate post-death interest created by a will, can be treated as part of the life tenant’s estate, while other post-2006 arrangements may fall within the relevant property regime. HMRC’s guidance identifies the interests that may be aggregated with a beneficiary’s estate. The label alone is not enough to determine the tax outcome.
Other common trust structures
There are various other trust structures available. In a bare trust, the beneficiary has an immediate and absolute right to the capital and income, even though the trustees hold legal title. For IHT purposes, an outright transfer into a bare trust may be a potentially exempt transfer and can become exempt if the donor survives seven years.
Special rules can apply to trusts for bereaved minors, beneficiaries aged 18 to 25, and vulnerable or disabled beneficiaries. Some qualifying vulnerable beneficiary trusts can claim special tax treatment, while bereaved-minor trusts can avoid the standard ten-year charges if the statutory conditions are satisfied.
Trust drafting, taxation, trustee powers, registration, and ongoing administration are all connected. A structure that is suitable for one family may be unnecessarily expensive or restrictive for another. Professional advice should therefore address both the purpose of the trust and the obligations that will continue after it has been created.
Pensions and IHT from April 2027
Pensions have historically been treated differently from most estate assets, but that position changes for deaths on or after 6 April 2027. From that date, most unused pension funds and pension death benefits will be included in the deceased member’s estate for IHT purposes. Personal representatives will primarily be responsible for reporting and paying any IHT due, while death-in-service benefits payable from registered pension schemes will remain outside the reform.
The change means that pension wealth may use part of the nil-rate band, increase the amount taxed at 40%, or push an estate above the £2 million RNRB taper threshold. A pension nomination remains important, but it will no longer by itself keep most unused pension benefits outside the IHT calculation. Transfers to a surviving spouse or civil partner can still benefit from the spouse exemption, subject to the detailed rules and the overall estate position.
For many families, the reform calls for a joined-up review of pension drawdown, nominations, lifetime gifting, wills, and cash available to meet tax. It should not prompt an automatic withdrawal because income tax and retirement security remain relevant. Read our detailed guide on IHT changes and pensions to understand the changes and practical considerations in more detail.
Charitable giving and the reduced 36% IHT rate
Gifts to qualifying charities are deducted from the value of the estate before IHT is calculated. A charitable legacy can be a fixed sum, a specific asset, or part of the residue left after other gifts and expenses. Where at least 10% of the relevant net estate is left to charity, the IHT rate on the qualifying part of the estate may reduce from 40% to 36%. The calculation is based on a statutory ‘baseline amount’, rather than simply 10% of the gross estate. The estate assets must firstly be divided between three categories for this purpose—the general (to include unused pension funds and pension death benefits from 6 April 2027), survivorship, and settled property components—to see if a component qualifies for the reduced rate.
Leaving more to charity can, in some circumstances, reduce the tax rate applied to the amount passing to non-charitable beneficiaries, but the precise outcome depends on the figures and wording of the will. The charitable legacy should be modelled and drafted carefully if qualifying for the reduced rate is part of the plan.
Business Relief and Agricultural Relief
Business Relief, commonly called BPR, can reduce the value of qualifying business property for IHT purposes. It may apply to a business or an interest in a business, shares in an unlisted company, and certain assets used by a business. Relief is available at 100% or 50%, depending on the property and the applicable allowance, and the deceased must generally have owned the business or asset for at least two years.
Relief is not available simply because an asset is held through a company or generates income. Businesses that consist wholly or mainly of making or holding investments, or dealing in securities, shares, land, or buildings are generally excluded. Ownership structure, trading activity, surplus assets, shareholder agreements, and succession arrangements can all affect whether relief is available.
Agricultural Relief, commonly called APR, can reduce the agricultural value of qualifying agricultural property. It can cover land or pasture used to grow crops or rear animals, together with qualifying farm buildings, farmhouses, cottages, and certain woodland. The property must satisfy occupation or ownership conditions, and APR applies to agricultural value rather than automatically covering every element of market or development value.
For deaths and other relevant transfers on or after 6 April 2026, the combined value of qualifying agricultural and business property eligible for 100% relief is capped at £2.5 million per individual. Qualifying value above that allowance generally receives 50% relief, producing an effective IHT rate of up to 20% on that portion. Separate rules govern trusts, lifetime transfers, spouses and civil partners, and certain shares traded on markets such as the AIM.
Ultimately, BPR and APR can be valuable reliefs but they are highly fact-sensitive. Business owners, partners, shareholders, farmers, and landowners should review eligibility before a sale, gift, retirement, restructuring, or change in how land or business assets are used.
Wills and the wider estate plan
A will is the legal foundation of an estate plan because it records who should receive the estate, appoints executors, and can establish trusts on death. Without a valid will, the intestacy rules determine who inherits, which may not reflect the deceased’s wishes. A valid will must also meet formal signing and witnessing requirements.
The will should align with the wider financial plan. Pension nominations, jointly owned property, lifetime gifts, trusts, business agreements, and life policies may affect what passes under it. An estate plan should also consider liquidity because IHT often needs to be paid before probate is granted.
Reviewing the plan is particularly important after marriage, civil partnership, divorce, bereavement, the birth of a child or grandchild, a substantial change in wealth, a business transaction, or a change in tax law. A codicil can make an official alteration to an existing will, but major changes will usually call for a new will.
When to seek professional inheritance tax advice
Professional advice is especially important where an estate includes a business, agricultural property, trusts, overseas assets, a large pension, lifetime gifts, an unmarried partner, a blended family, or vulnerable beneficiaries. The same applies where a person wants to retain access to a gifted asset or balance tax planning against retirement income and control.
Effective inheritance tax planning begins with a reliable valuation of the estate, a clear record of the family’s aims, and an understanding of how the will, gifts, trusts, pensions, and succession arrangements work together. The rules will continue to change, but a coordinated plan can be reviewed and adapted as the family, assets, and legislation develop.
Speak to HB&O about inheritance tax planning
HB&O’s Inheritance Tax, Trusts and Estates team helps individuals, families, business owners, and trustees understand their position and build practical plans around it. We can assist with estate reviews, lifetime gifting, trust planning and administration, pension nominations, Business Relief and Agricultural Relief, charitable giving, and the tax implications of wills.
With thresholds frozen through 2030 to 2031, the pension reforms taking effect from April 2027, and the revised relief rules already applying to qualifying business and agricultural property, arrangements that were suitable a few years ago may no longer produce the intended outcome. A timely review can identify gaps, clarify the available options, and ensure that each part of the estate plan supports the same objectives. Get in touch with our team today to arrange a conversation.
Frequently asked questions
What is the inheritance tax threshold?
The basic threshold, known as the nil-rate band, is £325,000 per person. An additional residence nil-rate band of up to £175,000 may be available where a qualifying home, or a share of it, passes to direct descendants such as children or grandchildren. Both thresholds are frozen up to and including the 2030 to 2031 tax year. The residence nil-rate band begins to taper away once the net estate exceeds £2 million, reducing by £1 for every £2 above that level.
How much is inheritance tax in the UK?
The standard rate of inheritance tax is 40%. It applies only to the part of the taxable estate that remains above the available thresholds after exemptions and reliefs have been applied. Where at least 10% of the relevant net estate is left to qualifying charities, the rate on the qualifying part of the estate may reduce to 36%. Transfers to a spouse or civil partner and gifts to qualifying charities are generally exempt.
How does inheritance tax work when the second parent dies?
If the first spouse or civil partner to die did not use all of their nil-rate band or residence nil-rate band, the unused percentage can usually be transferred to the survivor’s estate and claimed when the survivor dies. Where both full allowances remain available, a qualifying couple could potentially pass on up to £1 million without inheritance tax. This is not automatic, however. It depends on the value of the home passing to direct descendants, the size of the estate, the allowances used on the first death, and any relevant lifetime gifts.
How can I reduce inheritance tax through lifetime gifts?
Most outright gifts to individuals fall outside your estate if you survive for seven years after making them. Some gifts are exempt immediately, including the £3,000 annual exemption, small gifts of up to £250 per recipient, certain wedding or civil partnership gifts, and regular gifts made out of surplus income that leave your usual standard of living unaffected. Gifts only work if you genuinely give the asset away. Continuing to benefit from it, such as living rent-free in a home you have given to a child, can keep its value in your estate. Trusts can also form part of a plan, but they do not automatically take assets outside the inheritance tax regime.
Are pensions subject to inheritance tax?
From 6 April 2027, most unused pension funds and pension death benefits will be included in the deceased’s estate for inheritance tax purposes, with personal representatives primarily responsible for reporting and paying any tax due. Death-in-service benefits from registered pension schemes will remain outside the reform, and pensions passing to a surviving spouse or civil partner can still benefit from the spouse exemption. Pension wealth may now use up part of the nil-rate band or push an estate above the £2 million taper threshold, so drawdown, nominations, gifting and wills should be reviewed together rather than withdrawing funds automatically.
