Inheritance Tax and Succession Planning: Is It Time to Review Your Estate?

Inheritance Tax planning is often something people intend to deal with "later". The difficulty is that many of the most effective planning opportunities rely on decisions being made several years before they are actually needed.

This has become particularly important for business owners, property-owning families and individuals with significant pension wealth. Inheritance Tax thresholds remain frozen, the rules for Business Relief changed from 6 April 2026, and most unused pension funds are due to fall within the scope of Inheritance Tax from 6 April 2027.

For those likely to be affected, Inheritance Tax planning should therefore form part of a wider succession plan: deciding not only how tax can be managed, but who should ultimately own, control and benefit from family wealth and business interests.

When Does Inheritance Tax Apply?

The standard rate of Inheritance Tax is 40% and is generally charged on the value of an estate above the available tax-free thresholds.

Every individual currently has a £325,000 nil-rate band. An additional £175,000 residence nil-rate band may also be available where a qualifying home is passed to direct descendants.

Unused allowances can potentially be transferred between spouses and civil partners. This means a qualifying married couple or civil partnership may potentially pass up to £1 million to the next generation without Inheritance Tax.

However, the residence nil-rate band begins to taper away where the value of an estate exceeds £2 million. The headline £1 million figure can therefore be misleading. It does not apply to every estate.

Who Should Be Thinking About Inheritance Tax Planning?

Inheritance Tax planning is particularly relevant where an individual or family has:

• A valuable family home
• Investment or rental properties
• Significant cash or investment portfolios
• Shares in a private company
• A family business
• Agricultural property
• Significant pension funds
• Assets expected to increase substantially in value
• Wealth spread across several generations
• An estate approaching or exceeding £2 million

For business owners, there is an additional consideration: who will actually own and operate the business when the current shareholders step away? Tax planning and succession planning should therefore be considered together.

1. Start With an Estate Review

Before considering trusts, gifts or company restructures, the first step is to understand the current position.

An estate review should identify:

• Property and land
• Cash and savings
• Investment portfolios
• Business interests
• Company shares
• Pensions
• Life assurance
• Assets held jointly
• Existing trusts
• Significant lifetime gifts already made
• Outstanding mortgages and other liabilities

From this, an estimated Inheritance Tax exposure can be calculated.

This often changes the nature of the conversation. A family may believe they have an IHT problem when significant reliefs are actually available. Conversely, another family may have substantial exposure that has never previously been quantified.

2. Lifetime Gifting

One of the simplest forms of Inheritance Tax planning is giving assets away during your lifetime.

Most outright gifts made to individuals are potentially exempt transfers. Broadly, if the donor survives for seven years after making the gift, its value will normally fall outside their estate for Inheritance Tax purposes.

This is why timing is so important. Someone who begins succession planning in their 50s or 60s may have considerably more flexibility than someone attempting to reorganise their entire estate much later in life.

There are also annual exemptions. An individual can currently make up to £3,000 of gifts each tax year using the annual exemption, with unused exemption capable of being carried forward for one tax year. Separate exemptions also exist for smaller gifts and certain gifts made on marriage or civil partnership.

For larger estates, however, the £3,000 annual exemption alone is unlikely to materially change the IHT position. More strategic planning may be required.

3. Regular Gifts Out of Income

One of the most useful but sometimes overlooked IHT exemptions is normal expenditure out of income. There is no fixed monetary ceiling on this exemption.

Broadly, regular gifts may fall outside the estate immediately where they:

• Form part of the individual's normal expenditure
• Are made from income
• Leave the individual with sufficient income to maintain their normal standard of living

Examples might include regularly contributing towards a child's or grandchild's costs or making recurring financial gifts from surplus income.

Unlike an ordinary potentially exempt transfer, qualifying gifts do not have to wait seven years before falling outside the estate.

Good record keeping is essential. Bank statements, income calculations and a clear record of the pattern of gifts can become extremely important when the estate is eventually administered.

4. Be Careful When Giving Away Assets You Still Use

Simply transferring legal ownership of an asset does not necessarily remove it from the estate.

For example, transferring a property to your children while continuing to live in it rent-free is normally treated as a gift with reservation of benefit. The property can consequently remain within the donor's estate for Inheritance Tax purposes despite having legally been given away.

This is why arrangements involving family homes and other assets that the donor intends to continue using require particular care. The tax consequences should be understood before legal ownership is changed.

5. Business Owners Need a Succession Plan

For business owners, Inheritance Tax is only part of the problem. There are usually wider questions to answer:

• Who should inherit the company?
• Are the children actually involved in the business?
• Should ownership and management be separated?
• Should shares be transferred gradually?
• Should some children receive business assets and others receive investment assets?
• Is a future sale more appropriate than passing the business to the next generation?
• How will the retiring shareholder fund their own lifestyle?
• What happens if a shareholder dies unexpectedly?

These questions often require decisions many years before the eventual transfer.

6. Business Relief Changed From April 2026

Historically, qualifying shares in many private trading companies could benefit from 100% Business Relief for Inheritance Tax purposes. That position changed from 6 April 2026.

For individuals, 100% Agricultural Relief and Business Relief is now generally limited to a combined £2.5 million allowance. Qualifying value above the available allowance generally receives 50% relief instead.

Unused allowance can potentially transfer between spouses and civil partners, meaning a surviving spouse or civil partner could have up to £5 million of qualifying property benefiting from 100% relief where the conditions are met.

This is a significant change for owners of valuable private companies. For example, somebody owning a qualifying trading company worth £8 million should no longer simply assume that the entire business can pass to the next generation free of Inheritance Tax.

Succession planning for valuable family companies has consequently become much more important.

7. Does Your Business Actually Qualify for Business Relief?

Owning shares in a private company does not automatically mean Business Relief will be available. Among other conditions, the underlying company must generally be carrying on a qualifying business.

Businesses that mainly deal in investments, land or buildings, shares or securities may not qualify. The relevant business property must also generally have been owned for at least two years.

This creates an important issue for successful owner-managed companies. Over time, a trading company may accumulate:

• Large cash balances
• Investment portfolios
• Investment properties
• Other assets not required for the underlying trade

The impact of these assets on Business Relief should be considered as part of the company's wider tax and succession planning. Leaving this analysis until after the shareholder has died is clearly too late.

8. Passing Business Shares During Your Lifetime

Succession does not necessarily need to take place on death. A business owner may decide to transfer shares gradually to children or other family members while remaining involved in the company.

A gift of shares is normally treated as a disposal at market value for Capital Gains Tax purposes. However, Gift Hold-Over Relief may be available for qualifying gifts of business assets and certain shares.

Where relief applies, the Capital Gains Tax liability is effectively deferred rather than becoming payable immediately by the person making the gift. The recipient broadly inherits the deferred gain, which may become taxable when they eventually dispose of the asset.

This can make lifetime transfers an important part of business succession planning. The Capital Gains Tax and Inheritance Tax consequences must, however, be considered together before shares are transferred.

9. Consider Control as Well as Ownership

Succession planning does not necessarily require a business owner to hand over complete control immediately.

Different share classes, voting arrangements and properly drafted shareholders' agreements can sometimes allow economic ownership to be transferred gradually while appropriate control mechanisms remain in place.

For example, parents may want the next generation to begin participating in the future growth of a company without immediately giving them unrestricted control over major decisions.

This is an area where tax and legal advice need to work together. The objective should not simply be to minimise tax. The structure also needs to work commercially and avoid creating future disputes between family members.

10. Pension Wealth Will Need Reviewing Before April 2027

Pensions have historically played an important role in estate planning because many unused pension funds could sit outside an individual's estate for Inheritance Tax purposes. That is changing.

From 6 April 2027, most unused pension funds and pension death benefits will be included within the deceased member's estate for Inheritance Tax purposes. Death-in-service benefits payable from registered pension schemes are among the exclusions.

This is particularly relevant for individuals who have deliberately avoided drawing pension funds because they intended to pass the pension to their children. For some families, their retirement and estate planning strategy may therefore need reconsidering.

This does not automatically mean that pensions should be withdrawn. Income Tax, investment growth, retirement requirements, beneficiaries' circumstances and the wider estate all need to be considered before changing a pension strategy.

11. Trusts Can Still Have a Role

Trusts can be useful succession-planning tools where an individual wants greater control over how and when assets ultimately reach beneficiaries.

They might be considered where:

• Beneficiaries are young
• The family wants assets managed over several generations
• There are concerns about giving significant wealth outright
• Business interests need to be held collectively
• Asset protection or family governance is an important consideration

However, transferring assets into trust is not automatically tax-free. Depending on the type of trust and assets transferred, Inheritance Tax can arise when assets enter the trust, at ten-year anniversaries and when assets subsequently leave the trust.

Trust planning should therefore begin with the family's objectives rather than simply establishing a trust because it is perceived to be tax efficient.

12. Review Your Will Alongside the Tax Planning

Tax planning can be undermined by an outdated will. A will should be reviewed when there are significant changes in:

• Family circumstances
• Business ownership
• Property ownership
• Company structures
• Personal wealth
• Tax legislation

For business owners in particular, the will should work alongside any shareholders' agreement, partnership agreement, company articles and succession strategy.

It is important to establish what legally happens to shares on death rather than simply assuming that the intended family member will inherit and control the company.

13. Consider How Any Inheritance Tax Will Be Funded

Sometimes eliminating an Inheritance Tax liability completely is neither practical nor commercially desirable. In those circumstances, the planning exercise should consider how the liability will actually be funded.

A family may own substantial wealth but have relatively little cash. For example, an estate could contain:

• A £2 million family home
• A £5 million private company
• Investment property
• Relatively modest cash reserves

A large IHT liability can create pressure to sell assets at an inappropriate time simply to fund the tax. Life assurance, cash reserves and the availability of statutory instalment options can therefore form part of the wider succession plan.

From April 2026, the option to pay IHT on qualifying Agricultural and Business Relief property by 10 equal annual interest-free instalments was extended to all qualifying APR and BPR property.

Inheritance Tax Planning - Final Thoughts

There is rarely one solution to Inheritance Tax. Effective succession planning may involve a combination of:

• Lifetime gifts
• Gifts from surplus income
• Business Relief
• Transferring business shares
• Gift Hold-Over Relief
• Trust planning
• Pension planning
• Wills and family governance
• Corporate restructuring
• Life assurance and liquidity planning

More importantly, tax should not be considered in isolation. Giving assets away purely to save Inheritance Tax can create much greater problems if the individual subsequently needs those assets themselves, loses control of a family business or transfers wealth to beneficiaries before they are ready to manage it.

The objective should be to establish who should receive the wealth, when they should receive it, how much control the current owner should retain and what tax consequences arise from achieving those objectives.

The earlier these conversations take place, the greater the range of options normally available.

How RUS Can Help

Our specialist tax team can work with individuals, families and business owners to assess their existing Inheritance Tax exposure and develop a longer-term succession strategy.

We can help you:

• Calculate your estimated Inheritance Tax exposure
• Review the availability of the nil-rate band and residence nil-rate band
• Review previous lifetime gifts
• Advise on lifetime gifting strategies
• Consider regular gifts out of surplus income
• Review Business Relief and Agricultural Relief
• Assess the impact of the April 2026 Business Relief changes
• Consider the tax implications of transferring a family business to the next generation
• Advise on Capital Gains Tax and Gift Hold-Over Relief
• Review company structures from a succession-planning perspective
• Consider the implications of pensions entering the IHT estate from April 2027
• Work alongside your solicitor and financial adviser on wills, trusts, pensions and protection planning
• Develop a longer-term succession plan which can be reviewed as family circumstances and legislation change

If you have built significant personal or business wealth, succession planning should not begin when you are ready to retire.

Contact RUS Chartered Accountants to discuss your Inheritance Tax position and whether steps should be taken now to protect and pass wealth to the next generation efficiently.

This article is intended as general guidance only and should not be treated as individual tax, legal, investment or financial advice. Inheritance Tax and succession planning depend heavily on individual circumstances, and professional advice should be obtained before making gifts, transferring business interests or restructuring an estate.