Inheritance tax (IHT) remains one of the UK's most significant wealth transfer challenges for those with substantial estates. For individuals with assets exceeding £1 million, understanding the available planning mechanisms is essential. This guide explores the reliefs and exemptions that apply, from nil-rate bands through to charitable giving and recent regulatory changes affecting business property relief.

Before implementing any strategy, it's important to consider your individual circumstances with a qualified financial adviser, as inheritance tax planning involves complex considerations that depend on your specific situation.

The IHT allowances available

The current inheritance tax regime provides several layers of allowance before tax becomes payable. These allowances form the foundation of any estate plan.

The nil-rate band

The nil-rate band is currently £325,000 per person. This is the value of your estate that can pass to your beneficiaries entirely free of inheritance tax. For married couples or civil partners, the position differs substantially: if the first spouse to die doesn't use their full nil-rate band, the unused portion can be transferred to the surviving spouse. This means a married couple can have a combined nil-rate band of £650,000.

For individuals with estates exceeding £1 million, even with a joint nil-rate band of £650,000, a significant portion of their assets may still be subject to IHT at the standard rate of 40% above that threshold.

The residence nil-rate band (RNRB)

Since 2017, an additional relief has been available: the residence nil-rate band, currently worth £175,000 per person. This additional allowance applies specifically when a main residence is left to direct descendants (children, grandchildren, or more distant lineal descendants).

For a married couple, this can create a combined RNRB allowance of £350,000, bringing the total joint nil-rate band to £1 million. This is a significant relief for homeowners with substantial property values, particularly in high-value property markets such as London and the South East.

How the seven-year gifting rule works

One approach some individuals consider is making gifts during their lifetime. The inheritance tax treatment of such gifts depends on several factors, particularly the timing and nature of the gift.

The seven-year rule

Gifts made more than seven years before death are removed entirely from your estate for inheritance tax purposes. This means the capital transferred, and any growth on that capital after the gift, falls outside your taxable estate. Gifts made within seven years of death are still potentially subject to inheritance tax, though relief is given on a sliding scale the further back the gift was made.

This mechanism can be valuable for those in good health who wish to progressively transfer assets to family members. Making regular gifts to younger family members allows both the transferred capital and future growth to escape IHT.

Annual exemptions

The annual exemption allows you to gift £3,000 per tax year free of inheritance tax immediately, regardless of when you die. Any unused exemption can be carried forward one year, meaning in certain cases you can gift up to £6,000 in a single year if you have carried forward the prior year's allowance. Additionally, small gifts of up to £250 per person per year are exempt, and gifts from surplus income are fully exempted if made regularly and sustainable from income.

Spousal and civil partner exemptions

The unlimited spousal exemption is one of the most valuable reliefs in the inheritance tax system. Any amount can pass from one spouse to another entirely free of inheritance tax, regardless of the size of the estate.

This exemption applies whether the transfer occurs during lifetime or at death. For married couples, this means that on the death of the first spouse, the entire estate can pass to the surviving spouse free of tax. The full nil-rate band (and RNRB, if applicable) of the deceased spouse can then be preserved and utilised on the death of the surviving spouse.

However, if your spouse is not a UK domiciliary, the unlimited exemption becomes restricted. This is an important consideration for families where one or both partners are non-UK domiciled, particularly in an increasingly internationally mobile society.

How trust structures work

Trusts are a sophisticated planning tool that can help manage estate tax. They allow assets to be held separately from your personal estate and can provide greater control over how and when beneficiaries receive their inheritance.

Flexible life interest trusts

A flexible life interest trust (sometimes called an estate trust or discretionary trust) allows a spouse or other beneficiary to enjoy income and potentially capital during their lifetime, with assets passing to the next generation thereafter. One approach some people take is to use such a trust in a will to defer IHT on assets passing to the surviving spouse, whilst retaining some control over the ultimate destination of the estate.

Discretionary trusts

Discretionary trusts give trustees flexibility to distribute income and capital to beneficiaries according to circumstances. Whilst assets held in discretionary trusts are still subject to inheritance tax, trusts can be structured to make efficient use of multiple nil-rate bands if you have multiple family members. Trusts also offer protection if a beneficiary faces financial difficulties or relationship breakdown.

Trust tax considerations

It's worth understanding that trusts attract their own tax complications. Discretionary trusts face a 20% tax charge on entry and periodic 10-yearly charges on growth, plus exit tax if assets leave the trust. These costs need to be weighed carefully against the benefits, and proper professional advice is essential before establishing any trust arrangement.

Charitable giving and the 36% IHT rate

One significant relief available to those wishing to make charitable donations is the reduced inheritance tax rate. If 10% or more of the net value of an estate is left to qualifying charities, the standard 40% inheritance tax rate is reduced to 36% on the remainder of the estate.

For those with substantial estates, this can represent meaningful tax savings. For example, an individual with a £2 million estate leaving £200,000 to charity (10% of £2 million) would benefit from the 36% rate on the remaining £1.8 million (above the nil-rate band). This mechanism allows individuals to both make a positive impact and manage their tax position.

Charitable contributions can be made during lifetime or through your will. Additionally, if you make substantial charitable gifts during your lifetime using the seven-year gifting rule, they fall outside your estate entirely if you survive seven years from the date of the gift.

AIM shares and business property relief: April 2026 changes

Business Property Relief (BPR) has historically provided 100% relief on certain qualifying business assets, including shares in unquoted companies and shares listed on the Alternative Investment Market (AIM). From April 2026, the landscape has shifted significantly.

Changes to AIM share relief

Effective from 6 April 2026, relief on AIM shares will be restricted. For the first £2.5 million of AIM holdings, 100% relief remains available (meaning no inheritance tax is payable). However, for AIM share holdings in excess of £2.5 million per individual, the relief is reduced to 50%. This creates a significant planning consideration for those with substantial investment portfolios concentrated in AIM-listed companies.

For married couples, each spouse benefits from their own £2.5 million allowance, so a joint couple could have £5 million in AIM shares with full 100% relief. Above that threshold, however, 50% relief applies. This distinction may influence decisions about whether to hold AIM investments individually or jointly.

Planning considerations

Individuals holding substantial AIM portfolios may wish to review their holdings in light of this change. Some approaches people are considering include diversifying concentration risk, potentially restructuring holdings between spouses to maximise the relief available, or reviewing the suitability of continued AIM investment in the context of their overall inheritance tax position. Proper professional advice specific to your circumstances is essential before making any changes.

Pension changes from April 2027

From April 2027, the inheritance tax treatment of pensions will change. Historically, unused pension funds have typically fallen outside the scope of inheritance tax, making pensions an attractive vehicle for passing wealth to the next generation. The forthcoming changes will alter this position.

It's worth understanding that from April 2027, inherited pensions will generally be subject to inheritance tax at 40% (or 36% if the 10% charitable giving threshold is met). This represents a significant change, as pension savings have previously benefited from favourable IHT treatment. The timing of when you take retirement benefits from pensions may therefore become an important consideration in your overall estate plan.

For those with significant pension funds, consideration of whether to crystallise benefits before the April 2027 change, the order in which different assets are passed to beneficiaries, and the overall structure of the estate may all become more important. This is a complex area that warrants specialist advice.

A structured approach to estate planning

For those with estates exceeding £1 million, effective inheritance tax planning typically involves considering several elements together rather than adopting a single strategy. A comprehensive approach may include:

  • Making full use of both your nil-rate band and residence nil-rate band (particularly important for couples to ensure unused allowances are not wasted)
  • Considering whether lifetime gifting strategies align with your objectives and ability to gift
  • Reviewing trust structures if you wish to maintain control whilst planning for tax efficiency
  • Assessing whether charitable giving forms part of your wider values and wealth transfer objectives
  • Reviewing concentration risk in AIM investments in light of the April 2026 changes
  • Planning the timing of pension benefits in light of the April 2027 IHT changes

Key takeaways

Managing inheritance tax on estates over £1 million requires careful planning that considers your individual circumstances. The mechanisms available are all tools that you may wish to consider, depending on your situation: nil-rate bands, the residence nil-rate band, spousal exemptions, the seven-year gifting rule, trusts, charitable giving, and business property relief.

The April 2026 changes to AIM share relief and the April 2027 changes to pension taxation represent important developments that may affect your planning timeline and strategy.

The role of professional guidance

Inheritance tax planning is not one-size-fits-all. Your optimal strategy depends on your specific assets, family circumstances, objectives, and timescales. Rather than implementing strategies based on general information, it's important to discuss your situation with a qualified financial adviser who understands your full circumstances.

IFA Connect's matching service connects high net worth individuals with financial advisers who specialise in inheritance tax and estate planning. Our advisers can provide tailored guidance on your inheritance tax position whilst meeting your wider financial objectives.

Connect with a specialist IFA today to discuss your inheritance tax planning.

Disclaimer

This article is for informational purposes only and does not constitute financial advice. Tax rules can change, and the information contained here is correct as at the date of publication. For advice tailored to your circumstances, speak with a qualified financial adviser. IFA Connect recommends that any inheritance tax planning decisions be made in consultation with an appropriate professional adviser.