01

Annual gift exemption

Every individual has a 3,000 annual gift exemption that falls completely outside their estate for IHT purposes with no seven-year survival requirement. Unused allowance carries forward once giving 6,000 in a single year. For a married couple combining both allowances produces 12,000 per year in IHT-free gifting.

Over ten years systematic use removes 120,000 from the taxable estate saving up to 48,000 in IHT at the 40% rate. Smaller exemptions also apply: gifts on marriage up to 5,000 from each parent and small gifts of up to 250 per person per year. These reset on 6 April each year and are permanently lost if not used.

Many estates lose years of accumulated exemption simply because no systematic gifting programme was implemented. A standing order into a child account funded from the annual exemption on 1 April each year is one of the most cost-effective estate planning steps available to any UK family.

02

Residence nil rate band

The residence nil rate band (RNRB) is an additional IHT allowance of 175,000 per individual when a qualifying residential property is left to direct descendants. Combined with the standard 325,000 nil rate band each individual has a total threshold of 500,000. For a married couple both sets of allowances combine on the second death producing a combined threshold of 1 million.

The RNRB tapers away for larger estates. For every 2 by which the net estate exceeds 2 million the RNRB reduces by 1. For estates of 2.35 million or above the RNRB is entirely withdrawn. Downsizing rules allow a notional RNRB to be claimed if the main residence was sold after July 2015.

Professional will drafting is essential to ensure the RNRB is correctly claimed and not inadvertently lost through careless trust drafting.

03

Seven year gifting rule

Any gift to an individual falls entirely outside the estate for IHT purposes if the donor survives seven years from the date of the gift. There is no limit on the size of such a gift. If the donor dies within seven years taper relief reduces the effective IHT rate.

Gifts three to four years before death attract an effective rate of 32%. Four to five years: 24%. Five to six years: 16%. Six to seven years: 8%. A gift of 500,000 made four years before death would attract IHT of 120,000 rather than 200,000 - an 80,000 saving purely from timing.

For cash gifts there is no CGT complication making systematic cash gifting one of the cleanest estate planning tools available.

04

Gifts out of normal expenditure

The normal expenditure out of income exemption (IHTA 1984 section 21) has no monetary cap and applies immediately with no seven-year rule. Three conditions must all be met: the gifts must form part of a habitual pattern; they must come from income not capital; and after making the gifts the donor must retain sufficient income to maintain their normal standard of living.

The most common application is paying regular premiums on a life insurance policy written in trust for children. If premiums come from surplus income and the conditions are met the entire death benefit passes outside the estate IHT-free even if the donor dies the following day.

HMRC requires careful record-keeping. Executors must complete form IHT403 with detailed evidence of income expenditure and the habitual pattern of giving.

05

Business property relief

Business property relief (BPR) provides 100% IHT relief on qualifying business assets. 100% BPR applies to sole trader businesses partnership interests shares in unlisted trading companies and qualifying AIM-listed shares. The asset must have been owned for at least two years and the business must be a genuine trading business.

From April 2026 BPR was capped at 1 million at the 100% rate - assets above this threshold qualify for only 50% relief. This significantly affects larger business estates and requires urgent review of existing succession plans.

AIM portfolios constructed specifically for IHT planning remain popular for those seeking BPR within the 1 million threshold.

06

Life insurance written in trust

A life insurance policy written in trust pays directly to named beneficiaries outside the estate - the payout is not subject to IHT. Without a trust the payout forms part of the estate and 40% goes to HMRC if above the nil rate band. Setting up a trust costs nothing - major insurers provide standard trust documentation.

The most common application is a whole-of-life policy written in trust to cover an anticipated IHT liability. A joint life second death policy with a sum assured matching the expected IHT bill provides the cash to pay the bill without forcing a property sale.

Relevant life policies for company directors are also written in trust - premiums are company-deductible and the benefit passes to the family outside the estate.

07

Pension planning and the April 2027 change

Until April 2027 pension funds sit completely outside the estate for IHT purposes. From April 2027 unused pension funds will be brought into the IHT net. A pension pot of 500,000 left to adult children will face potential IHT of 200,000 before income tax applies on withdrawals.

Actions to consider before April 2027: review nomination of beneficiary forms; consider whether accelerating drawdown and redirecting into ISAs or BPR investments makes sense; take advice on optimal asset drawdown sequencing in retirement.

Under the new regime the optimal drawdown order changes materially from the current position. Professional advice is essential as the rules interact with income tax CGT and IHT simultaneously.

08

Spousal exemption and transferable nil rate band

Transfers between married couples and civil partners are completely exempt from IHT - unlimited and with no seven-year rule. The transferable nil rate band means that if the first spouse leaves everything to the survivor the unused nil rate band transfers giving the survivor two full nil rate bands of 650,000 plus potentially two RNRBs of 350,000 a combined threshold of 1 million.

The spousal exemption defers rather than eliminates the IHT problem. On the second death only one estate remains. The spousal exemption is not available to cohabiting couples.