IHT essentials: the key steps every family should know

Certain gifts are immediately exempt from IHT, with no need to survive seven years. The annual exemption (£3,000 per donor per year) and small gifts exemption (£250) are examples of such tools, and they can be worth using every year. For individuals with income that exceeds their needs, gifts out of surplus income can be a significant planning tool if used carefully over time.

This is still the most widely used and effective form of IHT planning. There is no limit on how much you can give away, provided you survive seven years from the date of the gift. For many people, this is also the most rewarding option, giving them the chance to see the difference the money makes to their family.

Trusts have a reputation for being complex and costly, but the concept is straightforward.  A trust is a legal arrangement that enables assets to be held by trustees on behalf of beneficiaries, allowing the donor to transfer assets without those assets being immediately distributed to a beneficiary.

This matters where a family needs an added layer of protection, or where it is not yet clear who should benefit.

There are many different types of trust, the two that are most commonly used are: Bare trusts and discretionary trusts. A bare trust is often used for passing funds down to children or grandchildren, with the beneficiary becoming absolutely entitled to the funds from age 18. A discretionary trust gives trustees ongoing control over who benefits and when they benefit, offering more flexibility. This additional flexibility does come at the cost of a less favourable tax position, but this is a position that can be planned around.

 Some trusts also allow the donor to retain a benefit, through a right to withdraw capital or a fixed income for life, while still achieving IHT savings.

A discretionary trust can help, but for wealthier families it is not always the complete answer, since there is a limit to how much can be placed into a trust without incurring upfront IHT charges. In practice, many people use a trust and a company or partnership structure together. The company or partnership holds the assets, separating control and decision making from the right to capital, so a donor can pass on growth and income rights to the next generation while retaining control of the assets. Holding investments inside a company can also be more tax efficient than holding them personally, allowing wealth to build up within that structure over time.

A life insurance policy pays out on death, precisely when an IHT bill is due, making it a practical way to fund IHT rather than reduce it. There are two main types of policy that we look to for IHT planning. Term insurance, where you are insured for a set period of time, covers the risk of dying unexpectedly before planning has had time to take effect. It is typically cheaper because there is no guaranteed payout. Whole-of-life cover, which guarantees a payout a payout as long as premiums are paid, is more expensive but represents a more long-term, and potentially lifelong, solution.. This is often useful where a residual liability is expected to remain despite a long-term IHT strategy. How the policy is held matters as much as the cover itself, and policies should usually sit in a trust so proceeds do not fall back into the estate on death.

Certain investments qualify for Business Relief or Agricultural Property Relief. The rules around this changed from April 2026, but valuable reliefs remain available, whether by owning agricultural land or a trading business, or by investing in off-the-shelf products designed to qualify. These carry higher risk and should only be considered with appropriate advice.

The structure of a will determines when IHT becomes payable and who benefits, which makes it a direct lever on the level of tax a family ultimately pays. Most wills we review need updating, whether because circumstances have changed, legislation has moved on, or new IHT planning has been put in place since the will was written. Keeping your will up to date is essential.

Anything left to charity in your will is fully exempt from IHT, and giving 10% or more of your estate to charity reduces the IHT rate on the rest to 36%. This means the true cost to your family is often far smaller than the benefit the charity receives. From April 2027, this will extend to pension funds too, and in some cases, families will end up better off leaving pension funds to charity than to loved ones directly.

With pensions forming part of the estate from April 2027, leaving them untouched is often no longer a sensible approach. For many, the right strategy will mean drawing down pension assets during life and either gifting that additional income away, or potentially using the freed-up capacity to gift other assets instead. Pensions are set to play a far bigger role in the wider planning conversation, and this is a topic we will return to in future articles.