Estate Planning Overview

Key facts

Inheritance Tax (IHT) is charged at 40% on the value of your estate above the nil-rate band.
The nil-rate band is £325,000 per person (frozen until at least April 2030).
The residence nil-rate band adds up to £175,000 when a home is left to direct descendants.
A married couple or civil partners can pass up to £1,000,000 combined before IHT applies.
Gifts made more than 7 years before death are generally outside the estate for IHT.

Inheritance Tax: The Basics

Inheritance Tax (IHT) is charged at 40% on the value of your estate above the nil-rate band when you die. Your estate includes property, savings, investments, life insurance (if not in trust), and most other assets.^[1]

Allowance	Amount (2026/27)	Conditions
Nil-rate band (NRB)	£325,000	Available to everyone
Residence nil-rate band (RNRB)	£175,000	Home left to direct descendants
Spouse/civil partner exemption	Unlimited	Assets passing between spouses
Combined NRB + RNRB (couple)	£1,000,000	Both unused allowances transferred to surviving spouse

Taper on RNRB: If your estate exceeds £2,000,000, the residence nil-rate band is reduced by £1 for every £2 above that threshold. At £2,350,000, the RNRB is fully lost.^[2]

Lifetime Gifts and the 7-Year Rule

Giving away assets during your lifetime is one of the most effective IHT planning tools. Gifts fall into several categories:^[3]

Immediately Exempt Gifts

£3,000 annual exemption — can be carried forward one year if unused
Small gifts of up to £250 per recipient (unlimited recipients)
Wedding gifts — £5,000 from parents, £2,500 from grandparents, £1,000 from others
Gifts to charities and political parties — fully exempt
Gifts between spouses or civil partners — fully exempt
Normal expenditure out of income — regular gifts from surplus income (not capital)

Potentially Exempt Transfers (PETs)

Larger gifts to individuals are “potentially exempt transfers.” If you survive 7 years after making the gift, it falls completely out of your estate. If you die within 7 years, the gift uses up your nil-rate band, and taper relief may reduce the IHT due:^[3]

Years Before Death	IHT Rate on Gift
0 – 3 years	40%
3 – 4 years	32%
4 – 5 years	24%
5 – 6 years	16%
6 – 7 years	8%
7+ years	0% (fully exempt)

Using Trusts in Estate Planning

Trusts can be useful for IHT planning, though they come with their own tax rules. Common approaches include:

Discretionary trusts: Assets are held for the benefit of a class of beneficiaries. Subject to a 20% lifetime IHT charge on transfers exceeding the NRB, plus periodic charges
Bare trusts: Assets are held for a named beneficiary who has an absolute right. Treated as a PET by the settlor, so outside the estate after 7 years
Life insurance trusts: Placing life insurance in trust keeps the payout outside your estate, providing IHT-free funds to cover the tax bill

Tip: If you have a life insurance policy, consider placing it in trust. This is straightforward, usually costs nothing, and ensures the payout is available quickly to pay any IHT bill without going through probate.

The Importance of a Valid Will

A properly drafted will is the foundation of any estate plan. Without one:

Your estate is distributed under intestacy rules, which may not reflect your wishes
Unmarried partners receive nothing under intestacy
You may miss the residence nil-rate band if your home does not pass to direct descendants
There is no opportunity to set up trusts or make tax-efficient provisions

Business and Agricultural Relief

Certain business and agricultural assets qualify for 100% or 50% relief from IHT:^[1]

100% relief: Unquoted trading company shares, sole trader/partnership business assets
50% relief: Controlling shareholding in a listed company, land/buildings used in the business
Agricultural relief: 100% on agricultural property used for farming (subject to occupation conditions)

Budget 2024/25 changes: From 6 April 2026, Business Property Relief and Agricultural Property Relief are limited to the first £2.5 million per estate of qualifying assets at 100% relief (raised from an originally-announced £1 million on 23 December 2025), with a 50% rate applying to the excess. This is a significant change for owners of larger business or agricultural estates.

Frequently Asked Questions

How much can I leave tax-free?

Each individual has a nil-rate band of £325,000. If you leave your home to direct descendants (children, grandchildren), you may also get the residence nil-rate band of £175,000, giving a total of £500,000. Married couples and civil partners can transfer any unused nil-rate band to the surviving spouse, giving up to £1,000,000 combined.

Are gifts tax-free?

Many gifts are immediately exempt: the £3,000 annual exemption, small gifts of up to £250 per person, wedding gifts (£5,000 from parents, £2,500 from grandparents, £1,000 from others), and gifts from normal expenditure out of income. Larger gifts become “potentially exempt transfers” (PETs) and fall out of the estate after 7 years.

Do I need a will for IHT planning?

Yes. Without a will, your estate is distributed according to intestacy rules, which may not align with your wishes or be tax-efficient. A will lets you direct assets to your spouse (exempt from IHT), leave your home to descendants (to use the residence nil-rate band), and set up trusts where appropriate.

Are pensions subject to Inheritance Tax?

Generally no. Pensions held in a discretionary trust (which most defined contribution pensions are) sit outside your estate for IHT purposes. This makes leaving your pension untouched and spending other assets first an effective estate planning strategy.

Sources

How Inheritance Tax works: thresholds, rules and allowances — GOV.UK
Inheritance Tax: residence nil rate band — GOV.UK
Inheritance Tax: gifts — GOV.UK