How to Plan Who or What to Spend Your Estate on

Successful inheritance tax (IHT) planning ensures your estate is distributed according to your wishes while minimising the tax payable. Key to this is making and regularly updating your Will. Lifetime gifting, Will planning and structuring asset ownership all play crucial roles in managing IHT exposure. In the next two articles we'll highlight some of the measures you can take to ensure you mitigate your IHT liability so that you have more to spend on or leave to the people, places or things that are dear to you. 

Nil rate bands

The nil rate bands are: 

• Standard nil rate band: £325,000 (frozen until 5 April 2030).
• Residence nil rate band: £175,000 when leaving a home to direct descendants.
• Tapered withdrawal of residence nil rate band for estates above £2 million.

Unused allowances can be transferred between spouses/civil partners, potentially doubling the threshold to £1 million on the second death. 

Basic IHT planning and exemptions - Gifts

Everyone should consider using annual IHT exemptions:

• Gift annual exemption : £3,000 per year; unused amounts from the previous year can be carried forward once.
• Small gift allowance: £250 per person, to as many people as you like.
• Gifts for weddings and civil partnerships: £5,000 to children, £2,500 to grandchildren, and £1,000 to others are exempt.

Regular gifts from surplus income can also be exempt, with no limit, if they do not impact your lifestyle but good record-keeping is essential.

Tax planning tips:

• Use your gift annual exemption(£3,000 + previous year's carry-forward) before 5 April.
• Maximise small gifts and marriage gift allowances to reduce your taxable estate.

More substantial gifts

Gifts of cash or assets during your lifetime, if made without retaining a benefit, fall outside of your estate after seven years.  If you survive between three and seven years Taper Relief applies to reduce the rate of inheritance tax. However, gifting assets may incur a capital gains tax liability so take advice first. 

Tax planning tips:

• Gift early to start the 7-year clock for IHT exemption.
• Avoid retaining benefit in any gifted asset to ensure it falls outside your estate. 

Business and Agricultural Property Relief (BPR and APR)

From 6 April 2026, the first £1 million of qualifying property receives 100% relief; excess only receives 50%. This also applies to lifetime transfers post-30 October 2024 if the donor dies on or after 6 April 2026.

From 6 April 2025, APR will apply to environmentally managed land under certain government agreements.

Reliefs of up to 100% are available for:

• Trading businesses or partnerships.
• Shares in unquoted trading companies.
• Agricultural land used in qualifying ways.

Tax planning tips:

• Where property qualifies for both APR and BPR, APR takes priority.
• For optimal use of both reliefs, ensure that the agricultural value of land and buildings is fully utilised for APR, while the business value of non-agricultural assets is covered by BPR.
• Where agricultural land is likely to be sold for development, if BPR fails and only APR is allowed there may be IHT due on the development value.  Consider strategies to maximise the potential for BPR, such as restructuring agreements or ensuring land qualifies for BPR. 

AIM Shares

From 6 April 2026, AIM shares will qualify only for 50% BPR relief, rather than the current 100% rate. 

Tax planning tips:

• Reassess AIM shareholdings before April 2026, consider other tax reliefs available such as Business Asset Disposal Relief, Investors’ Relief or income tax loss relief. 
• Consider the timing of disposals to benefit from lower CGT rates or to avoid the impact of upcoming changes.
• In order to maximise reliefs ensure compliance with the qualifying conditions such as maintaining the required holding period. 

Unused Pension Funds and Death Benefits

From 6 April 2027, unused pension funds and death benefits payable from pensions will be included in a person’s estate for IHT purposes.

Tax planning tip:

• Consider using pension funds strategically by drawing down the pension to make gifts, fund a life assurance policy or fund lifestyle goals, whilst reducing the exposure to IHT. 

Downsizing relief

If a home is sold or downsized, equivalent assets passed to direct descendants may still qualify for the residence nil rate band if they qualify for a downsizing addition. This ensures continuity in tax efficiency even after changes in residence.

Tax planning tip:

• Keep clear records when selling or downsizing your home to ensure that the estate’s personal representative has the required information to make the claim for this valuable relief. 

Debts and loans

Debts secured against taxable estate assets can reduce IHT liability, provided they meet commercial terms. Anti-avoidance rules may deny relief for non-commercial arrangements.

Tax planning tips:

• Secure debts against taxable estate assets to maximise IHT relief.  
• Avoid informal or non-commercial loan arrangements that may be disqualified.
• Proper documentation and commercial justification for liabilities are crucial if deductions are to be secured.

 As always, these articles provide an overview of the various measures available and no action should be taken without seeking professional advice. At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help businesses, individuals and families. If you’d like to discuss any of the above, please get in touch.