Generally, gifts between married couples and registered civil partners are exempt from IHT. Where an exemption does not apply, gifts made more than seven years before death will also escape tax in most cases. Therefore, with advance planning, gifts can be made tax-free which can lead to substantial tax savings. Here, we highlight some of the main opportunities for minimising the impact of Inheritance Tax.

Scope of IHT

When a person dies IHT becomes due on their estate. IHT can also apply to some lifetime gifts, however, most are exempt, providing the donor survives for seven years after making the gift.

The rate of tax on death is 40% and 20% on lifetime transfers, where chargeable. Currently, the first £325,000 is chargeable to IHT at 0% – this is known as the nil rate band.

Residence nil rate band

An additional nil rate band was introduced for deaths on or after 6 April 2017 where an interest in a qualifying residence passes to direct descendants. The amount of relief was initially phased in and is currently £175,000. For many married couples and registered civil partnerships (hereafter referred to as “spouses”) the relief is effectively doubled, as each individual has a main nil rate band and will also potentially benefit from the residence nil rate band.

The residence nil rate band can only be used in respect of one residential property, which does not have to be the main family home but must have been a residence of the deceased at some point. Restrictions apply where estates (before reliefs) are more than £2 million.

Where a person died before 6 April 2017, their estate will not have qualified for the relief and if the first spouse has died since then, they may not have used the relief. A surviving spouse may be entitled to an increase in the residence nil rate band if the spouse who died earlier has not used, or was not entitled to use, their full residence nil rate band. This often results in a doubling of the residence nil rate band for the surviving spouse.

Downsizing

The residence nil rate band may also be available when a person downsizes or ceases to own a home on or after 8 July 2015, where assets of an equivalent value (up to the value of the residence nil rate band) are passed on death to direct descendants.

Charitable giving

A reduced rate of IHT applies where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs, and the nil rate band) is left to UK charities. In these cases, the 40% rate will be reduced to 36%.

IHT on lifetime gifts

Lifetime gifts fall into one of three categories:

• a transfer to a company or a trust (except a disabled trust), which is chargeable immediately;
• exempt gifts which will be ignored, both when they are made and on the subsequent death of the donor, e.g., gifts to charity;
• other outright transfers will be Potentially Exempt Transfers (PETs) and IHT is only due if the donor dies within seven years of making the gift. An alternative way of looking at this is that they are potentially chargeable until seven years have passed. The primary example of a PET is a gift to another individual.

IHT on death

The main IHT charge is likely to arise on death. IHT is charged on the value of the estate treated as beneficially owned by the deceased. This may include certain types of interest in trust property.

Furthermore:

• PETs made within seven years become chargeable;
• there may be an additional liability because of chargeable transfers (usually lifetime gifts to trusts) made within the previous seven years.

Estate planning

The majority of estate planning involves making lifetime transfers to utilise exemptions and reliefs, or to benefit from a lower rate of tax on lifetime transfers.

However, careful consideration needs to be given to other factors. For example, a lifetime gift may save IHT but may create a Capital Gains Tax (CGT) liability. Furthermore, the prospect of saving IHT should not jeopardise the financial security of those involved.

Gifts between spouses

As stated previously, gifts between spouses are generally fully exempt from IHT, if both are either UK ‘long-term resident’ or both non ‘long-term resident’. From 6 April 2025, an individual will be treated as a LTR once they have been resident in the UK for 10 out of the previous 20 tax years (for more details, please see the section on Residency Status, below).

Special rules apply where only one spouse is a long-term resident and mean that the spousal exemption may be restricted. If this applies, advice should always be sought to ensure the reliefs are maximised. It may be beneficial to use the spousal exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band, and PETs.

Gifts to individuals during their lifetime

As these gifts are PETs (rather than chargeable transfers when made), no tax at all is due if the donor survives for seven years. Even where a death occurs within seven years, IHT may be saved as a result of the lifetime gifts because the charge is based on the value at the date of the gift and does not include any potential growth to its value on the date of death.

These rules only apply to outright gifts. Where a benefit is retained, such as the gift of a house in which the donor continues to live rent-free, special rules apply and the donor is treated as still owning the asset for IHT. Professional advice should always be taken before considering such actions.

Nil rate band and seven-year cumulation

Chargeable transfers (such as lifetime gifts to trusts) covered by the nil rate band can be made without incurring any IHT liability. Once seven years have elapsed between chargeable transfers, an earlier transfer is no longer considered when determining IHT on subsequent transfers. Therefore, every seven years a full nil rate band will be available to make lifetime chargeable transfers.

Transferable nil rate band

It is possible for spouses and civil partners to transfer the nil rate band unused on the first death to the surviving spouse for use on the death of the surviving spouse/partner. On their subsequent death, their estate will be able to use their own nil rate band and in addition, the same proportion of a second nil rate band that corresponds to the proportion unused on the first death. This allows the possibility of doubling the nil rate band available on the death of the surviving spouse/partner. This arrangement can apply where the second death happens after 9 October 2007, generally irrespective of the date of the first death.

Annual exemption

An amount of £3,000 per annum may be given by an individual without an IHT charge. Any unused annual exemption may be carried forward (one year only) for use in the tax year that immediately follows.

Small gifts

Gifts to individuals not exceeding £250 in total per tax year, per recipient, are exempt. The exemption cannot be used to cover part of a larger gift.

Normal expenditure out of income

Gifts which are made out of income which are typical and habitual, and do not result in a fall in the standard of living of the donor, are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.

Family maintenance

A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.

Wedding presents

Gifts in consideration of marriage are exempt up to £5,000, if made by a parent with lower limits for other donors.

Gifts to charities

Gifts to UK registered charities are exempt, provided that the gift becomes the property of the charity or is held for charitable purposes.

Business property relief (BPR)

When ‘business property’ is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief. It is available on worldwide assets. In cases where full relief is available, there is little incentive from a tax point of view to transfer such assets in lifetime. Additionally, no Capital Gains Tax will be payable where the asset is included in the estate on death. Professional advice should be sought to determine whether you have qualifying business property.

Agricultural property relief (APR)

APR is similar to BPR in that it reduces the value of the transfer but may not give full relief on the value. It is available on the transfer of agricultural property so long as various conditions are met. APR was restricted to UK assets only from April 2024.

Changes to BPR and APR from 6 April 2026

Announcements have been made to restrict the combined amount of APR and BPR relief that an individual can have from 6 April 2026. The changes have significantly impacted the position where relief was previously 100% or 50%, it is now reduced to £1 million (£1m) across the combined value of qualifying property at 100% and the balance at 50%.  Additionally, the rate of BPR on shares not listed on a recognised stock exchange (e.g. AIM shares) will be reduced from 100% to 50%

The £1m limit is per individual and is not transferrable to a spouse, for example, on death.  This makes BPR and APR planning a key component of Inheritance Tax planning and Wills need to be updated to ensure each individual’s £1m allowance is not lost.

HMRC have been in consultation regarding the application of the £1 million allowance for property settled into trust qualifying for 100% APR or BPR. The consultation period has now closed, and we are waiting the outcome which will cover the following areas:

• Combined Allowance: a new £1 million combined allowance will apply to property qualifying for 100% APR or BPR. After this allowance is exhausted, relief will apply at a reduced rate of 50% for the combined value of qualifying agricultural and business property
• Shares on Recognised Stock Exchanges: the rate of BPR for shares not listed on recognised stock exchanges (e.g., AIM) will be reduced from 100% to 50%
• Trusts: for trusts, the £1 million allowance will be shared among all trusts created by the same settlor. Trusts established before 30 October 2024 will retain their own £1 million allowance
• 7 Year Refresh: every seven years the £1m is refreshed, giving another £1m allowance.

These proposals may have a significant impact on some clients. Please contact us to discuss if you have business or agricultural interests in excess of £1 million.

Residency Status

The concept of domicile as a connecting factor has been replaced with the concept of a long-term resident (LTR). Previously, non-UK domiciled and non-deemed domiciled individuals were subject to IHT on their UK assets only. From 6 April 2025, an individual is treated as a LTR once they have been resident in the UK for 10 out of the previous 20 tax years.

For the first nine years of residence, an individual will be subject to UK Inheritance Tax on their UK situs assets only. From year 10, the LTR individual will be subject to IHT on their worldwide assets. Additionally, HMRC have introduced an Inheritance Tax “tail” for LTRs who subsequently become non-UK residents.  This means that a LTR’s worldwide assets will remain within the scope of IHT for several years after their departure. British domiciles living overseas may also be liable to pay IHT so our residence tax specialists can advise in these circumstances.

Use of trusts

Trusts can provide an effective means of transferring assets out of an estate, whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.

We can advise you on whether a trust is suitable for your circumstances and the types of trust arrangements available.

Life assurance

Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.

A policy can also be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised, e.g., family company shares.

IHT on pensions from 6 April 2027

Currently, pensions are generally exempt from IHT and are not included in the estate value calculation. However, the Autumn Budget 2024 announced proposals to bring unused pension funds and death benefits into the value of a person’s estate for IHT purposes from 6 April 2027.

The full detail of the legislation is yet to be published, but in principle for individuals over 75, unused pension funds will be subject to both income tax (at the beneficiary’s marginal rate) and Inheritance Tax (at 40% on the value exceeding the nil-rate band) if left to someone other than a spouse. This means beneficiaries could face a combined tax burden on inherited pensions of 67% effectively.

Will reviews

Individuals have both a nil rate and a potential residence nil rate band available to mitigate IHT. Careful consideration is needed as to whether these should be used in full or part on the first spouse’s death, or whether they should be transferred to the second spouse for use.

There are several factors to be considered, including the overall value of the combined estate. Potentially, a second spouse has £650,000 of standard nil rate band and £350,000 of residence nil rate band, if nothing is used on the first death. In other words, £1 million in total before IHT is chargeable. This can only be achieved through careful planning.

In some cases, it may be preferable for the first deceased spouse to give some assets to the next generation and use up their own nil rate band and residence nil rate band. Having an up-to-date Will is pivotal to this planning and to ensure that any reliefs available are utilised efficiently.

How we can help

With significant IHT changes on the horizon, it is imperative clients review their Wills and that Inheritance Tax and succession planning advice is sought. To discuss this, or any other area of concern in relation to taxation and financial affairs, please get in touch with your usual SRLV advisor, or email our Partner, Kieron Clement-Smith.

This is an introduction to the general principles of Inheritance Tax. It is broad in approach and, like all things in the world of tax, “the devil is in the detail”. No two client situations are identical so we would urge you to contact us to discuss your specific circumstances.

This material is published for the information of clients and contacts. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or SRLV LLP.