The first thing to say is that this is very much a specialist subject, so do get proper professional advice before you do anything. Second, I always used to say to clients (and now remind my wife and myself) that you should not give away too much to your children (or anyone else) – just in case you might need it later … the dreaded care home fees etc. This relatively brief Post aims simply to spell out the structure of reliefs and exemptions, discussed on pages 66 – 68 of my book (as supplemented by the Updates Tab on the website), in the context of an overview of Inheritance Tax. And then of course you can refer to any of a number of publications.
So, to my Question: have you at least given some thought to the subject, even if you decide not to do anything just yet?
A brief note on the Inheritance Tax proposals in Rachel Reeves’ tumultuous Budget of 26 November 2026: happily, after the horrors proposed on the Budget of 30 October 2024 in relation to both Agricultural/Business Property Reliefs and Pensions (see below), there was just one relieving measure. The £1 million threshold for 100% Relief will now be transferable between spouses/civil partners, that is, available on the second death to the extent not used on the first. (We already know about the freezing of the general and residence nil-rate band thresholds until 6 April 2031.)
The General Rule on Death
Subject to the exemption for gifts to a surviving spouse/civil partner, the value of your Estate is totted up. That includes any chargeable gifts made in the seven years before you die, at their date of gift value. The general assumption in my book is that the reader is both domiciled and resident within the UK (comprising England and Wales, Scotland and Northern Ireland). Domicile is traditionally and broadly the country where you make your permanent home. I mention this simply because major changes were made with effect from 6 April 2025, broadly to abandon domicile as a test for UK tax purposes and to replace it with a test of long-term
residence (for typically 10 consecutive years of residence, subject to particular qualifications). I won’t go into further detail in this context, but anyone affected should get their own professional
advice.
The first £325,000 (the ‘nil-rate band’) of your Estate is free of tax, with the balance charged at 40%. This is subject to ‘tapering relief’ on the rate of tax charged, where the gift exceeded the nil-rate band of £325,000 and more than three years have passed since the date it was made. In addition, there is a residence nil-rate band of £175,000 for a property which has at some time been your residence and which is left to a direct descendant. If the chargeable estate exceeds £2m, the residence nil-rate band is tapered until the point where the estate exceeds £2.5m, when it disappears entirely. To the extent that either nil-rate band is not used on the first death, the unused percentage can be passed on to the death of your surviving spouse/civil partner.
There are five so-called ‘lifetime exemptions’. And then three/four reliefs and exemptions which apply both to lifetime gifts and on death.
The Lifetime Exemptions
1.Potentially Exempt Transfers (PETs)
These are gifts of any amount to an individual which you as the donor survives for seven years, in which case it becomes exempt. Death within that period makes the gift chargeable. A gift must be absolute, that is the donor must enjoy (or ‘reserve’) no benefit from it.
2. The Annual Exemption
Gifts of £3,000 in total (to one or more people) in a tax year (6 April to 5 April) are exempt. To the extent that the allowance is unused, it can be carried forward for one year only.
3. The £250 small gifts exemption
A gift of up to £250 (but no more) to any individual in a tax year is exempt. Note that this exemption can’t be used in conjunction with the £3,000 annual exemption.
4. Normal expenditure out of income
A transfer will be exempt if (taking one year with another) it was made out of income, so as to leave you with sufficient net income to maintain your usual standard of living, that is,
without resort to capital.
5. The marriage/civil partnership exemption
When a person gets married or enters into a civil partnership, the exemption for gifts to either party depends on the relationship between donor and donee:
* £5,000 per parent (or step-parent)
* £2,500 per grandparent (or step-grandparent)
* £1,000 for all others.
A gift may be in kind as well as in cash. The gift must be an outright gift. And it can also be in contemplation of marriage/civil partnership (to a particular person!).
Reliefs and Exemptions applying both to lifetime gifts and on death
1. The spouse/civil partner exemption
This applies equally to lifetime gifts and inheritances following a death. The exemption is
limited to £325,000 for gifts from a UK resident person to a spouse/civil partner who is not UK resident.
2. The charities exemption
This exemption applies to gifts on death just as to lifetime gifts. However, one advantage of a lifetime gift is the possibility of Income Tax relief for Gift Aid: both basic rate recovery for
the charity and higher rate relief for the donor.
3. Reliefs for agricultural and business property
Subject to particular conditions, the gift of an interest in a trading business or of shares in a trading company is likely to attract 100% Business Property Relief on market value in computing IHT. If the business is a farm, a mix of Agricultural Property Relief and Business Property Relief may well apply. The reliefs apply equally with lifetime gifts, though there is then an additional condition.
Major changes were proposed by the Budget on 30 October 2024 to the regime for Agricultural and Business Property, introducing two significant restrictions to apply from 6 April 2026. First,
the two reliefs will apply only to the first £1m of the total value of qualifying Agricultural and Business Property in an Estate. Above that threshold the relief will be restricted to 50%, that is producing an effective rate of Inheritance Tax of 20%, albeit payable over ten years. Interestingly, the £1m threshold is given per taxpayer, so it would apply separately to individual partners/shareholders and indeed to Trusts (see the next but one paragraph). That said, if on or after 30 October 2024 an individual creates more than one Trust, the £1m threshold is divided between all such Trusts. Second, shares quoted on certain Stock Exchanges such as the
Alternative Investment Market (or AIM) attract 100% Business Property Relief once owned for two years, given that the business of a company is a qualifying trade. As from 6 April 2026 such relief will be restricted to 50%.
As for Agricultural Property Relief, while use for agricultural purposes is necessary, the relief will as from 6 April 2025 apply to land managed under a qualifying environmental agreement, as
proposed by Jeremy Hunt’s Budget on 6 March 2024. There are two types of Trust (or Settlement) for Inheritance Tax purposes: an interest in possession trust and a relevant property trust. An interest in possession trust (in which one or more beneficiaries have a right to the income as it arises) comprises both such a trust made before 22 March 2006 and such a trust arising under a Will (which is called an ‘immediate post-
death interest’ or IPDI). The beneficiary under an interest in possession trust is treated for Inheritance Tax purposes as if he/she owned the property outright. A relevant property trust comprises both discretionary trusts made before 22 March 2006 and any type of lifetime trust made since then. They are subject to a ‘periodic’ charge to Inheritance Tax every 10 years, standardly at 6%. Under the Budget 2024 proposals, that rate of 6% will be reduced to 3% in the case of qualifying Business and Agricultural Property for charges on or after 6 April 2026.
Pensions
This is a hugely complex subject, on which you will need good professional advice. Major changes were proposed by the October 2024 Budget. In broad terms, for deaths on or after 6 April 2027 any remaining pension funds (colloquially called a ‘pension pot’) will be treated as part of the chargeable estate for Inheritance Tax purposes. The spouse/civil partner exemption will apply in the usual way to any applicable funds passing to such a person. And then arises the point that where the deceased was aged 75 or older any net of IHT funds left in the pension pot will attract Income Tax at up to 45% on payment to one or more nominated
beneficiaries. This continues the existing rule, but produces the potential for double taxation first of Inheritance Tax and then of Income Tax. If the deceased died under 75, the beneficiary will usually receive the pension funds free of Income Tax, subject to the available lump sum and death benefit allowance.
There is also an issue on liability for Inheritance Tax, which of course can be calculated only once the chargeable estate is known including all or part of the £325,000 nil-rate band and potentially the £175,000 resident nil-rate band (for estates of no more than £2m). The executors are generally responsible for reporting and paying Inheritance Tax on pension funds, although the beneficiaries can instruct pension scheme administrators to pay the IHT direct to HMRC. That latter of course will more easily enable the relevant funds to be found. By contrast where it is the executors paying the tax, there may well be issues on how the money is to be accessed.
Lifetime Giving through Trusts
Any gift to trustees of a (non-charitable) settlement is an immediately chargeable transfer (as distinct from a potentially exempt transfer). This means that any balance over your available nil-rate band (say £325,000) is charged to IHT @ 20%, which increases to 40% should you die within seven years, subject to the ‘tapering relief’. This assumes that you and your spouse/partner are excluded from benefit under the settlement. But it does mean that if you want to make a gift and start reducing your chargeable estate, but don’t want to make it to one or more individuals outright, you could use the protection of a settlement, remembering the ongoing compliance (tax returns) obligations. So, given a clean giving history sheet, you and your spouse/partner could give away over a 15 year period £1.3
million between you with no IHT consequences, saving £520,000 in IHT [viz, £325,000 x 4 = ££1.3m @ 40%].
Post-death Planning
While we do in this country generally have testamentary freedom (subject to the ‘forced heirship’ rules in Scotland), you should bear in mind that a Will can generally always be ‘varied’ within two years of your death. The original beneficiary can make a document to redirect the property to someone else. Provided that the statutory provisions are followed, the substituted gift is written back into the Will. This avoids the on-gift having any Inheritance Tax implications in its own right. For example, an original donee child could redirect property to their own children (‘generation skipping’), so that if that donee were to die within seven years of the on-gift, that would carry no Inheritance Tax implications. Further, the rule does not apply for Income Tax purposes.
