Question 1

What is the inheritance tax threshold (nil-rate band) in the UK?

Accepted Answer

The standard nil-rate band is £325,000 per person (frozen until at least 2030). The residence nil-rate band (RNRB) adds up to £175,000 when passing a main residence to direct descendants, giving a maximum of £500,000 per person or £1 million per married couple. The nil-rate band (NRB) is the amount of an estate that is taxed at 0% for inheritance tax purposes. It has been frozen at £325,000 since 2009 and will remain frozen until at least 2030. The residence nil-rate band (RNRB) was introduced in 2017 and provides an additional allowance of up to £175,000 when a main residence is passed to direct descendants (children or grandchildren). The RNRB tapers away by £1 for every £2 of estate value above £2 million, so estates above £2.35 million lose the RNRB entirely. Married couples and civil partners can transfer unused allowances to the surviving spouse, meaning a couple can potentially pass on up to £1 million tax-free. Relevant legislation: Inheritance Tax Act 1984, Section 8 (nil-rate band); Finance (No. 2) Act 2015, Section 8 (residence nil-rate band). Example: A married couple owns a family home worth £700,000 and other assets worth £300,000, totalling £1 million. If the first spouse dies leaving everything to the surviving spouse, no IHT is due (spouse exemption). When the second spouse dies, they can use both nil-rate bands (£650,000 combined) and both RNRBs (£350,000 combined), giving a total allowance of £1 million. The estate of £1 million is fully covered, so no IHT is payable. Common mistake: Assuming the RNRB applies automatically regardless of estate size. For estates above £2 million, the RNRB tapers away, reducing the effective threshold. This affects many London families with high property values.

Question 2

How can I reduce inheritance tax on my estate?

Accepted Answer

IHT can be reduced through lifetime gifting (potentially exempt transfers), Business Property Relief, Agricultural Property Relief, trust structures, charitable giving, and strategic use of the residence nil-rate band. The right approach depends on your specific circumstances. There are several strategies for reducing inheritance tax. Lifetime gifting: gifts made more than 7 years before death are generally free from IHT (potentially exempt transfers). You can also gift up to £3,000 per year tax-free, plus wedding gifts and regular gifts from surplus income. Business Property Relief (BPR): qualifying trading business assets can receive 100% or 50% relief from IHT. Agricultural Property Relief (APR): qualifying agricultural property can receive 100% or 50% relief. Trusts: assets transferred to certain trusts may reduce the value of your estate. Charitable giving: gifts to charity are exempt from IHT and reduce the estate value. Life insurance written in trust can provide funds to pay IHT without increasing the taxable estate. Relevant legislation: Inheritance Tax Act 1984, Sections 5A-5D (BPR), Sections 115-117 (APR), Section 3A (potentially exempt transfers). Example: A business owner with qualifying trading shares worth £2 million: from April 2026, the first £2.5M gets 100% BPR (no IHT). Since the shares are worth £2M (below the £2.5M cap), they are fully covered by 100% BPR — no IHT. Without BPR, the IHT bill on those shares alone would be approximately £670,000 (after the nil-rate band). Common mistake: Leaving planning too late. Gifts made within 7 years of death may still be subject to IHT (tapered relief applies from year 3 onwards). Early planning gives the best results.

Question 3

What is Business Property Relief (BPR) and how does it work?

Accepted Answer

BPR provides up to 100% relief from inheritance tax on qualifying business assets, including shares in unlisted trading companies, sole trader businesses, and certain business property. It is one of the most powerful IHT reliefs available. Business Property Relief (BPR) can provide either 100% or 50% relief from IHT on qualifying business property. 100% relief applies to: a business or interest in a sole trader business; shares in an unlisted trading company (including AIM shares); and certain unlisted shares. 50% relief applies to: shares controlling more than 50% of the voting power in a listed company; and certain business assets held by a controlling shareholder. The business must be a 'trading' business — investment businesses (such as property investment companies) generally do not qualify. The property must have been owned for at least 2 years before death (or before transfer to a trust). Relevant legislation: Inheritance Tax Act 1984, Sections 104-113 (Business Property Relief). Example: A business owner holds 100% of the shares in a qualifying trading company worth £3 million. From April 2026: the first £2.5M gets 100% BPR (no IHT); the remaining £0.5M gets 50% BPR (effective 20% IHT = £100,000). If the company was a property investment company, BPR would not apply, and the IHT bill could be approximately £1.07 million. Common mistake: Assuming all business assets qualify for BPR. Investment activities (property letting, holding investments) typically do not qualify. A careful review of the business activities is essential before relying on BPR.

Question 4

What are the April 2026 IHT changes to Business Property Relief?

Accepted Answer

From 6 April 2026, BPR and APR are capped at £2.5 million of combined 100% relief. Above £2.5 million, relief is reduced to 50% (effective 20% IHT rate instead of 0%). This represents a significant change for business owners and farmers with assets above £2.5 million. The Autumn 2024 Budget announced significant changes to BPR and APR from 6 April 2026. The changes introduce a £2.5 million combined cap on 100% relief for qualifying business and agricultural property. For the value of qualifying assets above £2.5 million, relief will be reduced from 100% to 50%, meaning an effective IHT rate of 20% on the excess (instead of 0%). Transitional provisions may apply for assets held before 30 October 2024, but the detail is still being confirmed. This change significantly increases the IHT exposure of business owners and farmers with qualifying assets above £2.5 million, and proactive planning is strongly recommended. Relevant legislation: Finance Bill 2025-26 (as announced in the October 2024 Budget); IHTA 1984 Sections 104-113 (as amended). Example: A business owner has qualifying trading shares worth £3 million. Under the April 2026 rules (now in effect): £2.5 million gets 100% relief (no IHT); the remaining £0.5 million gets 50% relief (effective 20% IHT = £100,000). Before April 2026, the entire £3 million would have qualified for 100% BPR with no IHT. Common mistake: Assuming that BPR will protect all business assets after April 2026. The £2.5 million cap means business owners with significant assets should review their estate planning urgently.

Question 5

What is the 7-year rule for lifetime gifts?

Accepted Answer

Gifts made during your lifetime are potentially exempt transfers (PETs). If you survive for 7 years after making the gift, it becomes completely free from IHT. If you die within 7 years, the gift may be subject to IHT, with tapered relief applying from year 3. The 7-year rule applies to potentially exempt transfers (PETs) — most lifetime gifts to individuals (not trusts). If the donor survives for 7 full years after the gift, the gift is free from IHT. If the donor dies within 7 years, the gift is brought back into account for IHT, but tapered relief applies: 0% taper in years 1-3 (full IHT rate of 40% applies); 20% reduction in year 4 (effective rate 32%); 40% reduction in year 5 (effective rate 24%); 60% reduction in year 6 (effective rate 16%); 80% reduction in year 7 (effective rate 8%). Annual exemptions (£3,000 per year) and other exemptions (wedding gifts, gifts from surplus income) are also available. Relevant legislation: Inheritance Tax Act 1984, Section 3A (potentially exempt transfers); Section 7 (taper relief). Example: A parent gifts £500,000 to their child in 2020. If the parent dies in 2025 (5 years after the gift), tapered relief at 40% applies, reducing the effective IHT rate from 40% to 24%. The IHT on the gift would be approximately £120,000 (if the nil-rate band has been used). If the parent survives to 2027 (7 years), the gift is completely free from IHT. Common mistake: Assuming gifts are immediately tax-free. Most lifetime gifts are only free from IHT if the donor survives 7 years. Planning should account for the possibility of death within the 7-year period, potentially using life insurance to cover the IHT risk.

Question 6

Can I use trusts to reduce inheritance tax?

Accepted Answer

Yes. Trusts can be an effective IHT planning tool, particularly for transferring assets out of your estate while retaining some control. Different trust types (discretionary, interest in possession, bare) have different IHT treatment, and specialist advice is essential. Trusts can help reduce IHT by removing assets from your estate. A gift to a discretionary trust is a chargeable transfer, subject to the 20% lifetime IHT rate on amounts above the nil-rate band, but the assets are then held outside the estate for 7-year PET purposes. The trust itself is subject to periodic charges (every 10 years) and exit charges. Interest in possession trusts give the beneficiary a right to income, and the trust assets are treated as part of the beneficiary's estate. Bare trusts are treated as if the beneficiary owns the assets directly. The choice of trust depends on the objectives: asset protection, control, tax efficiency, and family circumstances. Trusts are complex and specialist advice is essential before establishing one. Relevant legislation: Inheritance Tax Act 1984, Sections 58-69 (chargeable transfers to trusts); Sections 71-79 (relevant property regime). Example: A grandparent transfers £300,000 to a discretionary trust for their grandchildren. The transfer is within the nil-rate band, so no lifetime IHT is due. After 7 years, the gift is a potentially exempt transfer that has become fully exempt. The trust assets are outside the grandparent's estate. The trust may be subject to periodic charges every 10 years, but these are typically small. Common mistake: Setting up a trust without understanding the ongoing IHT charges (entry charges, periodic charges, exit charges) and the compliance requirements. Trusts require annual tax returns and ongoing management.

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