Effective IHT planning structures for multigenerational wealth preservation

The restrictions to Business Relief from April 2026 and the proposed inclusion of pension assets within the scope of IHT from April 2027 has prompted many individuals to rethink their estate planning structures. For many years, IHT planning for those with private businesses and substantial pension funds has focused on building and protecting these assets and utilising or planning with other assets during lifetime. These legislative changes will mean that IHT planning strategies now need to be reconsidered to ensure they remain effective.

There is no one-size-fits-all solution. The most effective approach will depend on your individual circumstances, assets and objectives, and will often involve a combination of structures and actions. Below we start with some basic principles to be aware of when starting IHT planning and then come on to consider the main types of structures that can be utilised.

Making lifetime gifts

A common starting point for IHT planning is to make gifts during your lifetime. Lifetime gifting is the cornerstone of inheritance tax planning. Outright gifts can reduce the value of an estate, but they also present practical and tax considerations.

Most people know that for lifetime gifting to be successful the donor has to live for a seven year period after making the gift. However, several gifting exemptions are available that make gifts immediately exempt from IHT (and not subject to the seven-year-rule), such as charitable donations and gifts made from surplus income.

There are also partial exemptions from IHT up to a specified amount in certain circumstances, such as transfers that benefit from the annual exemption (currently £3,000), small gifts, and gifts in consideration of marriage or civil partnership.

In the absence of these exemptions applying, a gift to an individual is classed as a potentially exempt transfer (PET) and will be free from IHT if you survive for seven years after making the gift.

Gifts to trusts or corporate vehicles are considered chargeable lifetime transfers (CLTs) and, in the absence of a specific relief, are immediately subject to IHT at 20% (or 25% if the settlor pays the tax liability). In addition, IHT charges may apply if you do not survive seven years from the date of the gift.

Any lifetime transfer of value involving property other than cash will also constitute a disposal of that property for capital gains tax (CGT) purposes. In certain circumstances the associated CGT liability can be deferred, but in others the tax has to be paid by the donor at that point in time.

Making lifetime gifts is a straightforward and highly-effective part of IHT planning and is often one of the starting points for our conversations.

Business Relief and Agricultural Relief

Business Relief (BR) and Agricultural Relief (AR) are valuable tools for reducing IHT liabilities on qualifying business and agricultural assets.

BR can reduce the value of eligible business assets for IHT purposes by up to 100% or 50%, depending on the nature of the asset and the relevant qualifying conditions. However, businesses that primarily engage in investment activities, such as holding property, land, shares, or other investments, will generally not be eligible.

Similarly, Agricultural Property Relief can reduce the value[NN1]  of qualifying farmland and agricultural property for IHT purposes by up to 100% or 50%, subject to meeting the relevant ownership and occupation requirements.

These reliefs may apply to lifetime transfers, transfers on death and certain trust arrangements.

Where 100% relief is available, the potential IHT saving can be up to 40% of the asset's value. For a £2,000,000 transfer, the IHT saving could be up to £800,000.

Historically, BR and AR were effectively uncapped, meaning that qualifying assets could attract up to 100% IHT relief regardless of their value. As a result, individuals holding qualifying business or agricultural assets could often pass them to the next generation free from IHT on death, while also benefiting from a CGT uplift. This combination made retaining qualifying assets until death a common and highly effective estate planning strategy. However, recent changes have introduced a cap on the availability of 100% relief, limiting it to the first £2.5 million of qualifying assets per individual (with assets over that value subject to only 50% relief from IHT). While BR and AR remain valuable reliefs, families with business and agricultural assets exceeding £2.5 million per individual are increasingly considering utilising these reliefs alongside other estate planning strategies to manage their potential inheritance tax exposure.

Given the complexity of the rules and the value of the relief, it is important to undertake a detailed review of your business and agricultural assets. This can help establish whether the reliefs are available and how to incorporate them effectively into your wider IHT planning strategy.

Asset protection and retaining control

Many individuals are keen to begin passing wealth to the next generation but are hesitant to make outright gifts. Once a gift has been made, the donor loses control of the asset, and the recipient is generally free to use it as they wish. In addition, gifted assets may become exposed to claims arising from divorce, bankruptcy or other personal circumstances affecting the recipient.

This is often a particular concern where beneficiaries are young, financially inexperienced or where future beneficiaries may not yet have been born. In these circumstances, families frequently seek structures that allow wealth to be transferred whilst preserving some control and protection.

Trusts, family investment companies (FICs) and family limited partnerships (FLP) can all provide varying levels of asset protection and succession planning flexibility.

IHT planning structures

Trusts

Trusts remain one of the most effective tools for asset protection and succession planning. They can play an important role in protecting family wealth and controlling how and when future generations receive benefits.

Through a trust structure, assets can be held and managed by trustees for the benefit of current and future beneficiaries. This enables wealth to be protected from risks such as divorce, bankruptcy, financial immaturity and family disputes, whilst allowing trustees to make distributions in accordance with the settlor's wishes.

As mentioned above, a transfer into most discretionary trust structures is a CLT and can result in an immediate IHT charge of 20% where the value transferred exceeds the available nil-rate band. Trusts are subject to their own IHT regime and may incur periodic and exit charges during their lifetime. Where assets qualify for BR or AR, trusts can become significantly more attractive from an IHT perspective. Where qualifying BR/AR assets are transferred into trust, relief may reduce the value transferred for IHT purposes by up to 100%. As a result, it may be possible to settle qualifying shares of up to £2,500,000 (£5,000,000 of combined value for married couples and civil partners) into a trust without triggering an immediate IHT charge. This can provide families with the asset protection and succession planning benefits of a trust whilst minimising the IHT cost of the transfer.

A gift of assets other than cash may give rise to a CGT liability of up to 24%. However, CGT holdover relief may be available where assets are settled into trust, allowing the gain to be deferred until the trustees ultimately dispose of the assets. Accordingly, the decision between making an outright gift and settling assets into trust often involves balancing a potential CGT charge on an outright gift against a potential IHT charge on a transfer into trust.

Trusts can also be used to facilitate charitable giving. This can provide a structured approach to charitable giving across multiple generations while maintaining governance over how funds are applied.

Family Investment Companies (FICs)

For families seeking asset protection while avoiding significant trust-related IHT charges, or where the transferor wishes to continue to benefit from their assets, alternative structures such as FICs may be worth considering.

FICs are often used where some continuing access/benefit is needed to fund the donor’s lifestyle, and/or the assets do not qualify for BR or AR, and a transfer into trust would otherwise trigger a significant lifetime IHT charge.

Typically, parents establish a company and provide the initial funding, often in the form of a loan. Children, grandchildren, or a family trust can then subscribe for a separate class of shares (often termed ‘growth shares’) designed to participate in the company's future growth in value.

By using different classes of shares, it is possible to separate economic ownership from voting control, allowing you to retain decision-making powers whilst future growth accrues to children, family trusts or other family members. FICs offer both flexibility and control, making them a popular choice among high-net-worth individuals.

FICs can also offer flexibility in income distributions and the timing of wealth transfers. When profits are retained within the company to support future investment growth, they are generally subject to corporation tax at rates between 19% and 25%. This compares favourably with personal income tax rates of up to 45%, allowing wealth to accumulate more efficiently within the FIC structure. There may be a secondary layer of taxation on the distribution to shareholders but distributions can be managed to utilise individuals' income tax allowances.

Where there is also a desire to undertake philanthropy, consideration should be given to whether charitable giving should be made personally or by the FIC.

As a corporate structure, a FIC is subject to ongoing administrative, compliance, and tax obligations. These requirements can introduce additional professional costs compared with holding investments personally. Nevertheless, for many high-net-worth families, the IHT benefits combined with the ability to retain access to capital and also control can outweigh the extra compliance costs, making FICs a valuable component of a broader IHT planning structure.

Example

Mr and Mrs Smith establish a Family Investment Company and lend £5 million to the company. The company invests these funds in a diversified portfolio. Their children subscribe to growth shares with only a nominal initial value.

Over time, the investment portfolio grows to £8 million. The original £5 million loan remains owed to Mr and Mrs Smith (and can be repaid without further charges to income or capital gains tax), while the £3 million increase in value is broadly attributed to the children's growth shares. Mr and Mrs Smith can decide whether to declare dividend distributions annually and to which share class. Mr and Mrs Smith can also choose to draw down the loan to support their lifestyle, or progressively gift the loan balance, utilising the relevant IHT exemptions, further reducing the value of their estates if they no longer need their £5m.

Family Limited Partnerships (FLPs)

FLPs can provide similar succession-planning benefits to an FIC, whilst often being particularly attractive where UK real estate forms a significant part of the family wealth.

Whilst transferring UK real estate into a corporate structure can trigger substantial Stamp Duty Land Tax and other tax consequences, an FLP may offer a more flexible and tax-efficient alternative in appropriate circumstances. The partnership structure can allow value to be transferred to future generations while retaining control through the terms of the partnership agreement (such as voting control). The rights of partners should be carefully drafted to ensure that control is not inadvertently transferred and that the intended succession planning objectives are achieved.

A holistic planning approach

IHT planning is not a one-size-fits-all exercise. It is important to review your personal circumstances in the round when deciding on a structure that will help you achieve your goals.

Planning to pass on wealth to future generations should start early to allow time to consider tax considerations, ownership, and asset protection. IHT planning is often a long-term exercise that evolves over time as personal circumstances, legislation and governance change. Careful drafting of Wills and coordination with any trust or corporate structures can help ensure that both wider goals (whether these be philanthropic, funding retirement or family wealth) and efficient tax-planning can be achieved.

Even where substantial planning has been undertaken, some assets may remain exposed to IHT resulting in a residual IHT liability. This is particularly common where individuals retain valuable interests in FICs, businesses or other assets expected to remain within their estate. It is therefore often necessarily to consider the funding of this residual liability. This is typically done via either building up sufficient liquid assets, seeking to pay by instalments or an appropriate insurance policy written in trust that can provide liquidity to meet the future IHT liability.

Speak to an advisor today

If you have any questions about your IHT planning structure or anything discussed in this article, please get in touch with our team. A conversation regarding succession planning could lead to a more efficient IHT planning structure.

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