Inheritance Tax and Succession Planning
Inheritance Tax (IHT) is a tax that may be due on the net value of your estate upon death. This could include not only your financial wealth, but also personal possessions, some gifts that you make during your lifetime and your share of any property you own.
IHT has become a major topic in the news, with recent government reforms and policy freezes set to significantly increase the number of estates caught in the tax net. The Office for Budget Responsibility (OBR) forecasts that IHT receipts will surge from £8.4 billion in 2024–25 to over £14 billion by 2029–30, driven by the freezing of thresholds and upcoming tax rule changes.
These changes make IHT planning more important than ever—particularly for individuals with pensions, family businesses, or investments such as shares on the Alternative Investment Market (AIM), which have traditionally qualified for relief from IHT.
Here are three major developments to be aware of:
1. Unused pension funds to be subject to IHT (from April 2027):
From April 2027, unused pension funds will form part of your estate and could be taxed at 40%, removing a previously valuable IHT exemption.
2. Business and Agricultural Relief capped (from April 2026):
Reliefs on qualifying assets such as business interests and agricultural property will be capped at £1 million per person, with 50% relief (i.e. 20% effective IHT rate) applied to anything above that threshold.
3. AIM shares will see relief from IHT reduce from 100% to 50% (from April 2026)
AIM shares currently benefit from 100% relief once qualifying shares have been held for a minimum of 2 years. From April 2026, this relief will be reduced to 50% (i.e. 20% effective IHT rate).
4. Residency-based IHT rules replace domicile basis (from April 2025):
Individuals who have been resident in the UK for at least 10 out of the past 20 years will be liable for IHT on their worldwide assets, regardless of domicile, expanding the net for international families.
These updates have serious implications for succession planning. Without careful structuring, more of your estate could be lost to IHT, leaving less for your loved ones or intended beneficiaries. However, there are still powerful tools available—such as gifting, use of trusts, and updating your Will —that can help preserve your legacy and reduce or even eliminate IHT exposure.
In this article, we’ll guide you through:
- The fundamentals of Inheritance Tax
- Key thresholds and reliefs
- How to make use of trusts, gifts, and business relief
- What the new rules mean for pensions and AIM shares
- How professional planning can protect your family’s future
With some forward thinking and the right advice, you can take control of your estate and pass on your wealth as intended.
What is Inheritance Tax and who pays it?
Inheritance Tax is charged on the net value of your estate upon death if it exceeds the available nil-rate band allowances. Everyone has an IHT free Nil Rate Band (NRB) allowance of £325,000 and this is often also increased by a Residence Nil Rate Band (RNRB) of up to £175,000 (see below). The chargeable value of your estate which exceeds the nil-rate band allowances will be subject to IHT at 40%.
There are three ways in which IHT can be charged:
- On your estate when you die
- On certain gifts you make to individuals within the last seven years of your lifetime
- On certain gifts to Trust which you make during your lifetime
For a married couple or civil partners, where all assets are passed to each other on first death, IHT will often only apply on second death and only to assets above the combined Nil-Rate Band allowances. The survivor will inherit any unused NRB and RNRB from the first spouse to die which means there will often be up to £1m of available nil-rate band allowances.
Consideration for Inheritance Tax in succession planning
Without proper planning, IHT could lower the value of your estate and potentially impact the financial stability of your family. To safeguard long-term family interests and reduce a potentially significant tax bill, succession planning can be vital in preserving large estates through generations. The following IHT planning strategies could be a key part of your plan:
1. Nil Rate Band – maximising available allowances
In addition to the £325,000 Nil-Rate Band (NRB) allowance, you may also benefit from the Residence Nil-Rate Band (RNRB) allowance of up to £175,000 Which applies when a main residence is left to direct descendants such as children, stepchildren and grandchildren.
Combined, a couple could potentially shield £1 million of their estate from IHT.
However, the RNRB allowance will taper for estates worth over £2 million, reducing by £1 for every £2 above this level. This tapering, coupled with rising asset values, is dragging more estates into the IHT net.
Planning points include ensuring that your Will is written in a way to claim the full RNRB (if available). For some, gifting or spending assets to bring your overall estate to below £2 million could be a tax saving strategy.
2. Gifting and lifetime transfers
Gifts made during your lifetime can significantly reduce the taxable value of your estate, provided you survive for seven years after the gift is made (these types of gifts are called ‘Potentially Exempt Transfers’).
Some gifts are not subject to the ‘seven-year rule’ and are automatically exempt from IHT. These include:
- £3,000 annual gift allowance each tax year
- £5,000 for wedding gifts to your children and £2,500 for gifts to your grandchildren
- Regular gifts from surplus income if they do not affect your standard of livi
- Gifts to UK charities
Giving early and regularly, within your means, can be an effective strategy to reduce future IHT.
Our planners utilise cash flow planning to help determine if a gifting strategy is sustainable whilst not impacting on our client’s ability to meet normal expenditure.
If your estate is substantial, you may want to gift some of your wealth early before it gets caught by the 40% IHT sting. This is when planning and pre-empting IHT is beneficial – you give yourself time to utilise gifts and Trusts to transfer this wealth out of your estate ahead of your death. The longer you do this leading up to your death, the more you can potentially transfer outside of the realms of IHT.
3. Use of Trusts
Trusts allow you to pass assets to your chosen beneficiaries without giving them full control. It is possible for you to retain control of those assets by being a trustee of the trust Certain trusts also remove assets from your estate for IHT purposes.
When setting up a Trust you can choose which of your assets are held in it. Typically, these include property, cash or investments.
Common Trust structures include:
- Discretionary Trusts (flexible distribution control)
- Bare Trusts (often used for children)
- Loan Trusts (retaining access to capital but removing growth from estate)
- Discretionary trusts can give the most amount of control to the trustees, but this can come at a cost given the potential charges that can apply to Trust assets:
- 20% entry charge to IHT if the value exceeds the Nil-Rate Band
- Potential 10-year anniversary charges of up to 6% on trust assets above the available Nil-Rate Band
- Potential exit charges when assets leave the trust
Trusts are powerful, but complex—professional advice is essential.
4. Pensions – a changing landscape
Under current rules, most unused pension pots fall outside the estate for IHT. This has made pensions one of the most tax-efficient vehicles for passing on wealth.
But from April 2027, unused pensions are due to be brought into the estate for IHT purposes, losing that crucial protection.
If you were relying on your pension as a way of passing wealth to children or grandchildren, it’s important to review whether drawing on the pension sooner, to gift or spend, may be more suitable.
5. Charitable giving
A gift to a UK charity in your Will is exempt from IHT. In addition to this, leaving 10% or more of your net estate to charity can also reduce the IHT rate on the remainder of your taxable estate from 40% to 36%. This can sometimes mean that your beneficiaries are only marginally worse off overall by part of the estate going to charity.
For many, charitable giving can be a tax-efficient way to leave a lasting legacy.
6. Insurance
If you are in relatively good health, you can insure against some or all of the IHT due following your death by setting up a whole of life insurance policy. For a married couple, you would usually set this up to pay out on second death when the IHT becomes due.
You should ensure that any new or existing insurance contracts are set up to pay into a trust on your death rather than to your estate as, if not, the payout itself will likely be subject to IHT too.
Please note that insurance contracts can be subject to extensive medical underwriting before terms are offered.
7. Spending and enjoying the money
A key yet often overlooked strategy for reducing IHT is simply spending and enjoying your wealth during your lifetime.
Many individuals accumulate significant assets but hesitate to use them, fearing they might outlive their money. However, by gradually drawing down excess capital, to spend on holidays, home improvements, or helping loved ones, you could reduce the value of your taxable estate while still enjoying the money.
As financial planners, we use sophisticated cash flow modelling tools to bring clarity and reassurance. These tools map out your income, expenses, and long-term needs (including potential long-term care), demonstrating with confidence whether you can afford to spend more now without risking your future financial security.
8. Business Property Relief (BPR) and AIM shares
Until now, BPR has been a helpful method of IHT mitigation, especially for family businesses. Qualifying assets are typically exempt from IHT after two years of ownership.
From April 2026, however, BPR will be capped:
- The first £1 million of qualifying assets will still receive 100% relief; and
- Any excess will receive only 50% relief, meaning 50% of the value above the threshold will be taxed at 40% (an effective 20% rate).
This change means business owners may need to review their succession planning options in line with the new rules.
At present, AIM shares also qualify for BPR but from April 2026, these will only benefit from 50% relief, no matter the value. A review of any existing AIM shares may therefore be appropriate.
Our planners can advise on a range of different BPR qualifying investment portfolios for those that want to benefit from the inheritance tax relief within only two years, whilst retaining ownership of their assets.
The role of Wills, LPAs and regular reviews
To ensure a smooth transition of wealth and provide a clear vision for your beneficiaries, your succession plan requires legal documentation. At the top of the list should be your Will. This legally binding document is the backbone of estate planning and includes instructions for the distribution of assets, outlining the what, who, when and, even the why. If you die without leaving a Will, your assets will pass to your family in a specific order as set out by law, known as the ‘rules of intestacy’, As a result of this, your estate may not be distributed according to your wishes and in a worst case scenario, your estate could face unnecessary delays, costs, and IHT.
You should ensure that your Will:
- Is up to date
- Names appropriate executors and guardians
- Is suitable for your current family situation and assets
- Aligns with your overall tax and succession plan
- Leaves your estate to your chosen beneficiaries in the most appropriate way, considering their personal and financial circumstances.
Another important document to consider is a Lasting Power of Attorney (LPA). An LPA allows you to appoint people that you trust to manage your affairs should you ever become incapacitated. There are two types of LPA – one for Property and Financial Affairs, and one for Health and Welfare.
Both your Will and your LPAs should be reviewed regularly to ensure that they still accurately reflect your wishes, and especially after marriage, divorce, relocation, or changes in family structure.
The Importance of Professional Advice
Planning the future of your estate and business can be a very heavy burden. With so much to consider at once, it can be stressful making sure things go to plan on your own. With changing legislation and increasing complexity, navigating IHT without guidance can be costly. Our professional financial planning and legal teams can help you:
- Understand your estate’s current position
- Identify gaps in your plan
- Implement efficient strategies using trusts, pensions, and reliefs
- Support your family now and after your death
Seeking guidance from a professional will give you peace of mind in this complex area of tax planning and an experienced professional will be able to provide unique advice for you and your family.
A professional adviser can help you understand your options by discussing your personal circumstances, goals and values. They will guide you through the steps you need to take to protect your wealth and prepare the next generation for success.
After getting to know you and your family, a financial planner can also continue to support your family after your passing if required.
Ready to plan?
At Progeny, we specialise in working with High-Net-Worth individuals and families, combining financial, legal, and tax expertise with our connected financial thinking.
We can help you:
- Protect your estate from unnecessary taxÂ
- Structure your affairs for clarity and controlÂ
- Prepare the next generation with confidenceÂ
If you are ready to start your bespoke succession plan, please contact us.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only. This communication does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Please note
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
The Financial Conduct Authority does not regulate will writing and some forms of estate planning.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
