What are the best IHT planning strategies?

The best IHT strategies combine: lifetime gifting (using exemptions and PETs), trust structures, BPR-qualifying investments, life insurance written in trust, and effective wills. The right mix depends on your estate, family, and objectives. Effective IHT planning combines multiple strategies: (1) Lifetime gifting — use the annual exemption (£3,000), small gifts (£250), wedding gifts, and gifts from surplus income each year. Make larger gifts as PETs, starting the 7-year clock early. (2) Trust structures — use discretionary trusts for asset protection and control, or bare trusts for simple, low-cost gifting. Consider the IHT charges on trusts. (3) BPR-qualifying investments — invest in AIM shares or BPR-qualifying portfolios for 100% IHT relief after 2 years. (4) Life insurance — take out a whole-of-life policy written in trust to cover the remaining IHT bill. The policy pays out on death, providing funds to pay IHT without increasing the estate. (5) Effective wills — ensure your will is structured to maximise allowances (e.g., using the RNRB, preserving the transferable NRB). (6) Business succession planning — for business owners, use BPR, holdover relief, and succession planning. (7) Pension planning — review pension arrangements in light of the April 2026 IHT changes. The right mix depends on the estate's composition, the family circumstances, the donor's age and health, and the objectives. Specialist advice is essential. Relevant legislation: Inheritance Tax Act 1984 (various provisions); TCGA 1992 (holdover relief); Financial Services and Markets Act 2000 (insurance and investments). Example: A couple with a £2 million estate combines: annual gifting (£6,000 per year), gifts from surplus income (£20,000 per year), a £500,000 BPR-qualifying AIM portfolio, a whole-of-life insurance policy written in trust, and wills structured to use the RNRB. Over 10 years, approximately £260,000 is removed through gifting, £500,000 is BPR-relieved, and the insurance covers the remaining IHT bill. Common mistake: Focusing on a single strategy and ignoring others. The best results come from combining multiple strategies tailored to the specific estate and family circumstances.

When should I start IHT planning?

Start as early as possible. Lifetime gifting requires 7 years to be fully effective, BPR requires 2 years of ownership, and trust structures take time to set up. Early planning gives the best results and the most options. The timing of IHT planning is critical: (1) Lifetime gifting — gifts become fully exempt after 7 years. Starting early means more gifts will be outside the estate when you die. (2) BPR-qualifying investments — require 2 years of ownership to qualify for relief. Starting early ensures the 2-year period is completed. (3) Trust structures — take time to set up and involve entry charges. Starting early allows the trust to grow outside the estate. (4) Life insurance — premiums increase with age and health, so starting early reduces the cost. (5) Will planning — can be done at any time, but should be reviewed regularly. (6) Business succession planning — should start 5-10 years before the planned transfer. The ideal time to start IHT planning is when your estate is approaching or exceeds the IHT threshold (£325,000 for individuals, £500,000 with RNRB, £1 million for married couples). However, even if your estate is below the threshold, early planning can help manage future growth and take advantage of the 7-year rule. Relevant legislation: Inheritance Tax Act 1984 (various provisions). Example: An individual aged 60 with a £1.5 million estate starts IHT planning. They make lifetime gifts of £500,000 (PETs), invest £300,000 in BPR-qualifying AIM shares, and take out a life insurance policy. By age 67 (7 years later), the gifts are exempt, the AIM shares qualify for BPR, and the insurance covers the remaining IHT. If they had waited until age 70, the 7-year period would not be complete, and the gifts would still be in the estate. Common mistake: Waiting until retirement or later life to start IHT planning. The 7-year rule means earlier gifts are better protected, and some strategies (like life insurance) are cheaper when started young.

How does life insurance help with IHT planning?

Life insurance written in trust provides a lump sum on death that can be used to pay the IHT bill. The policy must be written in trust so the payout is outside the estate. Premiums may qualify as gifts from surplus income. Life insurance is a key component of IHT planning, particularly for estates that cannot be fully reduced through gifting and reliefs. A whole-of-life insurance policy provides a lump sum on death, which can be used to pay the IHT bill. The key requirements are: (1) The policy must be written in trust — if the policy is not in trust, the payout forms part of the estate and is itself subject to IHT, defeating the purpose. Writing the policy in trust ensures the payout goes directly to the beneficiaries without passing through the estate. (2) The sum assured should cover the estimated IHT bill — this requires an assessment of the estate's value and the likely IHT payable. (3) The premiums may be treated as gifts (PETs), but if they qualify as 'normal expenditure out of income' (regular gifts from surplus income that do not reduce the donor's standard of living), they are immediately exempt from IHT. (4) The policy can be a level-term or whole-of-life policy — whole-of-life is generally preferred for IHT planning as it guarantees a payout on death. Life insurance does not reduce the IHT bill itself, but it provides the funds to pay it, preventing the need to sell assets (particularly property) to pay the tax. Relevant legislation: Inheritance Tax Act 1984 (various provisions on life insurance and trusts); Financial Services and Markets Act 2000 (insurance regulation). Example: An individual has an estate of £1.5 million with an estimated IHT bill of £200,000. They take out a whole-of-life insurance policy for £200,000, written in trust. The premiums are £3,000 per year, funded from surplus income (qualifying as 'normal expenditure out of income'). On death, the policy pays out £200,000 to the trust, which is used to pay the IHT bill. The estate passes to the beneficiaries without the need to sell assets. Common mistake: Not writing the life insurance policy in trust. If the policy is not in trust, the payout is part of the estate and is subject to IHT, potentially increasing the IHT bill rather than covering it.

Should I invest in AIM shares for IHT planning?

AIM shares that qualify for BPR can provide 100% IHT relief after 2 years of ownership. This is useful for individuals with liquid assets who want to reduce IHT without giving up access to their wealth. However, AIM shares carry investment risk. Investing in AIM (Alternative Investment Market) shares is a popular IHT planning strategy for individuals with significant liquid assets. Key features: (1) BPR qualification — AIM shares are treated as 'unlisted' for BPR purposes and can qualify for 100% relief if the company is a qualifying trading company. (2) 2-year ownership — the shares must be held for at least 2 years before death to qualify for BPR. (3) No loss of access — unlike gifting, the investor retains access to their wealth (they can sell the shares if needed, though this would reset the 2-year BPR clock). (4) Investment risk — AIM shares can be volatile and illiquid. The investor risks losing some or all of their investment. (5) Diversification — BPR-qualifying AIM portfolios can be diversified across multiple companies to reduce risk. (6) April 2026 changes — from April 2026, the £2.5 million cap on 100% BPR will apply, so AIM portfolios above £2.5 million will receive only 50% relief on the excess. AIM share investing is suitable for individuals who are comfortable with investment risk and want to reduce IHT without giving up access to their wealth. Specialist advice from a financial adviser and tax adviser is essential. Relevant legislation: Inheritance Tax Act 1984, Section 105(1)(d) (unlisted shares); Finance Bill 2025-26 (BPR/APR cap). Example: An individual with £500,000 in cash invests in a diversified BPR-qualifying AIM portfolio. After 2 years, the shares qualify for 100% BPR. If the individual dies, the shares pass free of IHT, saving up to £200,000 (at 40%). The individual retains access to the shares and can sell them if needed (though this would reset the BPR clock). Common mistake: Investing in AIM shares without understanding the investment risk. AIM shares can be volatile and illiquid, and the investor may lose some or all of their investment. The investment decision should be based on both tax and investment considerations.

How often should I review my IHT plan?

Review your IHT plan every 2-3 years and after major life events (marriage, divorce, birth, death, significant change in asset values, changes in tax law). Regular reviews ensure your plan remains effective and up to date. IHT planning is not a one-time exercise — it should be reviewed regularly to ensure it remains effective. Key triggers for a review: (1) Time — review every 2-3 years to ensure the plan is on track and to make any necessary adjustments. (2) Major life events — marriage, divorce, birth of children or grandchildren, death of a family member, or significant health changes. (3) Changes in asset values — significant increases or decreases in property, investment, or business values. (4) Changes in tax law — the April 2026 BPR/APR changes, pension IHT changes, and any future changes to allowances or rates. (5) Changes in family circumstances — children reaching adulthood, changes in financial needs, or changes in relationships. (6) Business changes — sale of a business, acquisition, restructuring, or changes in business activities. A review should cover: the current value of the estate, the effectiveness of existing strategies, the need for new strategies, and updates to wills and trust structures. Specialist advice should be sought for each review to ensure the plan takes account of the latest tax rules and planning opportunities. Relevant legislation: Inheritance Tax Act 1984 (various provisions); Finance Acts (changes to IHT rules). Example: A couple set up an IHT plan in 2020, including lifetime gifting, a BPR-qualifying AIM portfolio, and life insurance. In 2025, they review the plan: the AIM portfolio has grown, the 7-year period on some gifts has been completed, and the April 2026 BPR changes are approaching. They adjust the plan by making additional gifts, reviewing the AIM portfolio, and updating their wills. Common mistake: Setting up an IHT plan and never reviewing it. Changes in asset values, tax law, and family circumstances can make the plan less effective over time. Regular reviews ensure the plan remains optimised.

What should I include in my will for IHT planning?

Your will should be structured to maximise IHT allowances, including using the RNRB, preserving the transferable NRB, considering trust structures, and making specific gifts to charity (for the 36% rate). Specialist advice is essential for will drafting. A well-drafted will is a key component of IHT planning. Key considerations: (1) Residence nil-rate band — ensure the main residence is left to direct descendants (children, grandchildren) to qualify for the RNRB. If the residence is left to a spouse, the RNRB is not used but is transferable. (2) Transferable nil-rate band — if the first spouse leaves everything to the surviving spouse (using the spouse exemption), 100% of the NRB is unused and transferable. Consider whether to use the NRB on the first death (e.g., by leaving assets up to the NRB to children) or to preserve it for the second death. (3) Trust structures — consider whether to include a nil-rate band trust or a discretionary trust in the will for asset protection or control. (4) Charitable gifts — consider leaving 10% or more of the estate to charity to qualify for the 36% IHT rate. (5) Business assets — if the estate includes business assets, ensure the will takes account of BPR and the interaction with other assets. (6) Specific gifts — make specific gifts to individuals or trusts, and ensure the residue (the remainder of the estate) is distributed in a tax-efficient way. (7) Guardians and executors — appoint guardians for minor children and suitable executors (including professional executors if the estate is complex). Specialist advice from a solicitor and tax adviser is essential for will drafting, particularly for complex estates. Relevant legislation: Inheritance Tax Act 1984 (various provisions); Wills Act 1837 (will formalities). Example: A married couple with a £1.5 million estate (including a £700,000 home) structure their wills to: leave the home to their children (qualifying for the RNRB), leave the remainder to each other (spouse exemption, preserving the transferable NRB), and include a 10% charitable gift (qualifying for the 36% rate). On the second death, the estate has a combined NRB of £650,000, a combined RNRB of £350,000 (if not tapered), and the 36% rate applies. Common mistake: Using a DIY will or a generic template for a complex estate. IHT planning requires a carefully drafted will that takes account of the specific estate structure and tax rules. Specialist legal advice is essential.

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IHT Planning Strategies

Effective IHT planning involves multiple strategies — lifetime gifting, trusts, BPR, life insurance, and wills. Understand how to structure your estate to minimise IHT.

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Inheritance tax planning is not a single action but a combination of strategies tailored to your specific circumstances. From lifetime gifting and trust structures to Business Property Relief and life insurance, the right mix of strategies can significantly reduce or even eliminate IHT. This guide covers the main IHT planning strategies and how to use them effectively.

The IHT Planning Framework

Effective IHT planning follows a framework: (1) Understand the estate — identify all assets, their values, and their IHT treatment (including reliefs and exemptions). (2) Maximise allowances — use the nil-rate band, RNRB, annual exemption, and other exemptions. (3) Remove assets from the estate — through lifetime gifting, trusts, and BPR-qualifying investments. (4) Cover the remaining IHT — through life insurance written in trust. (5) Review regularly — estate plans should be reviewed every few years and after major life events. The right strategy depends on the estate's composition, the family circumstances, and the donor's age and health.

Lifetime Gifting

Lifetime gifting is one of the simplest and most effective IHT strategies. Gifts become exempt after 7 years (PETs), and there are exemptions for annual gifts (£3,000), small gifts (£250), wedding gifts, and gifts from surplus income. The key is to start early — the 7-year clock starts from the date of the gift, so earlier gifts are better protected. Larger gifts can be covered by life insurance during the 7-year period.

Trust Structures

Trusts can remove assets from the estate while retaining control and providing asset protection. Discretionary trusts are subject to entry charges (20%), periodic charges (up to 6% every 10 years), and exit charges, but can be effective for family wealth planning. Bare trusts have no IHT charges but the assets are in the beneficiary's estate. The choice depends on the objectives: asset protection, control, tax efficiency, and family circumstances.

BPR-Qualifying Investmentss

Investing in BPR-qualifying assets (such as AIM shares or BPR-qualifying investment portfolios) can provide 100% IHT relief after 2 years of ownership. This is particularly useful for individuals who have significant liquid assets and want to reduce IHT without giving up control or access to their wealth. However, BPR investments carry investment risk, and the £2.5 million cap from April 2026 will affect larger portfolios.

Key Points

What You Need to Know

IHT planning involves a combination of strategies tailored to your circumstances
Lifetime gifting is simple and effective — start early for the 7-year rule
Trusts provide control and asset protection but involve IHT charges
BPR-qualifying investments can provide 100% IHT relief after 2 years
Life insurance written in trust can cover the remaining IHT bill

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Nil-Rate Band & Residence Nil-Rate Band Business Property Relief (BPR)April 2026 IHT Changes Agricultural Property Relief (APR)Lifetime Gifting & the 7-Year Rule Trusts & Inheritance Tax IHT for Married Couples IHT on Property & Estates IHT for Business Owners IHT Exemptions & Reliefs IHT on Foreign Assets IHT Planning Strategies IHT Rate & Calculation

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