Inheritance tax & estate planning

Estate planning means deciding what happens to your wealth when you die, or if you can no longer make decisions yourself. It also means arranging your affairs so your family receives as much as possible. It includes an up-to-date will, lasting powers of attorney, and reducing inheritance tax through gifts, trusts and allowances. It also covers choosing who receives your pensions. Without a will, intestacy rules decide who inherits. Without powers of attorney, your family may need to apply to the Court of Protection. Planning early matters more now, because larger estates lose the residence nil-rate band and pensions count towards estates from April 2027.

Everyone has a £325,000 nil-rate band, plus a £175,000 residence nil-rate band if their home passes to children or grandchildren. Anything left to a spouse or civil partner is exempt, and unused allowances pass to them, so a married couple can leave up to £1 million free of inheritance tax. Above that, the tax is 40%. These thresholds are frozen until April 2031. The residence allowance is reduced for estates over £2 million, so many larger estates lose some or all of it.

Potentially £940,000. Take a widow or widower with a £3 million estate, including the family home, who inherits their late spouse’s unused allowances. They’d have two nil-rate bands totalling £650,000, but lose the residence nil-rate band entirely because the estate is over £2.7 million. That leaves £2,350,000 taxed at 40%. A £2 million estate, by contrast, would pay £400,000. Between £2 million and £2.7 million, the shrinking allowance creates an effective 60% rate. From April 2027, unused pensions will count towards the estate too.

Most gifts to individuals are “potentially exempt transfers”. If you live for seven years after making the gift, it falls outside your estate completely. If you die within seven years, the gift is added back and uses up your nil-rate band first. Where gifts exceed the nil-rate band, taper relief reduces the tax on the excess if you die between three and seven years after the gift, with the rate falling from 32% to 8%. Gifts into most trusts are treated differently and can trigger an immediate 20% charge.

These are exempt immediately, however long you live:

• gifts to a spouse or civil partner
• £3,000 a year under the annual exemption, plus last year’s if unused
• small gifts of up to £250 per person
• wedding gifts of up to £5,000 to a child
• regular gifts from surplus income, with no upper limit, as long as they don’t reduce your standard of living.

For clients with high incomes, gifts from surplus income can be one of the most powerful planning tools available. Keep clear records.

Yes, from 6 April 2027 most unused pension funds and death benefits will count towards your estate, under the Finance Act 2026. Pensions left to a spouse or civil partner remain exempt, and death-in-service benefits are excluded. If you die after 75, your beneficiaries also pay income tax on what they withdraw. For an additional-rate taxpayer, the combined effect can reach 67%. Your executors are responsible for reporting and paying the tax, so review your nominations, withdrawal strategy and gifting plans now.

A trust lets you give assets away while keeping control over who benefits and when. Gifts into most trusts above your available nil-rate band trigger an immediate 20% charge, plus further charges of up to 6% every ten years. Some trusts work differently:

• A discounted gift trust can reduce your estate immediately while paying you a regular income.
• A loan trust freezes the value of your estate while you keep access to your original capital.

We work with your solicitor to choose the right structure.

Yes. A whole-of-life policy written in trust pays out outside your estate, giving your family the money to pay inheritance tax without selling property or investments in a hurry. Couples usually choose a joint-life, second-death policy, which pays out on the second death, when the tax usually falls due. Premiums can often be paid as gifts from surplus income, so they’re free of inheritance tax too. Cover is usually cheaper the earlier you arrange it.

Yes. Shares in certain unquoted trading companies can qualify for Business Relief after two years. Once they qualify, they fall outside your estate for inheritance tax while you still own them. Since April 2026, relief is 100% on the first £2.5 million of qualifying business and agricultural assets combined and 50% above that. AIM shares now qualify for 50% relief. These investments are higher risk and can be hard to sell, so they suit people who need a faster alternative to the seven-year rule and can accept the risk.

Not without careful planning. If you keep living in a home you’ve given away, HMRC treats it as a “gift with reservation” and it stays in your estate for inheritance tax. You can avoid this by paying your children a full market rent, although that rent is taxable income for them. Another option is giving a share of the home to children who live there with you and share the costs. Each option has capital gains tax and practical consequences, so take advice before acting.

Without a valid will, intestacy rules decide who inherits. That may not match your wishes and can waste inheritance tax allowances. A well-drafted will can also include trusts to protect assets, for example for young children or in case of a beneficiary’s divorce. Lasting powers of attorney, for property and financial affairs and for health and welfare, let people you trust act for you if you lose mental capacity. Without them, your family may have to apply to the Court of Protection, which is slow and costly. We work with specialist solicitors to put these in place.