Inheritance Tax: Key Strategies And Insights Explained

Inheritance Tax Planning Strategies for Individuals and Advisers

By Malcolm Finney BSc (Hons), MSc (Bus Admin), MSc (Org Psych)

Inheritance tax (IHT) is charged not only on an individual's estate on death but also on lifetime gifts. It has a reputation for being unavoidable, but in practice it is one of the most planning-responsive taxes there is: careful use of the exemptions and reliefs, the nil-rate bands, lifetime gifts, trusts and a well-drafted will can make a significant difference to the tax payable.

In this practical and authoritative guide, updated for 2026/27, Malcolm Finney, an international tax specialist with over 35 years' experience advising UK and overseas clients and a former head of tax at law firm Nabarro Nathanson, sets out everything advisers and individuals need to know to understand and plan around the new inheritance tax landscape.

What Is Inheritance Tax?

Inheritance tax is a tax levied when an individual dies or makes a lifetime gift. On death, it is charged at 40% on the value of their estate, broadly everything they own less any liabilities; in lifetime, it is charged on the value of the gift, at 20% on gifts into trust. A gift from one individual to another is a potentially exempt transfer (PET), taxed at 40% only if the donor dies within seven years, with taper relief where death occurs more than three years after the gift.

Every individual has a nil-rate band of £325,000, on which the rate is 0%, and a residence nil-rate band of up to £175,000 may be available where a home is left to children or grandchildren on death. Gifts between spouses and civil partners are generally exempt, and any unused nil-rate bands can pass to the surviving spouse or civil partner. Cohabiting couples get neither the spouse exemption nor the transfer of unused bands.

Inheritance Tax Changes and the Traps to Avoid

The rules have changed in a fundamental way. Under the Finance Act 2025, domicile, the concept that had underpinned IHT for decades, was abolished from 6 April 2025 and replaced with a residence-based test. An individual's exposure to IHT on their worldwide assets now depends on whether they are a 'long-term UK resident', broadly someone who has been UK resident for at least ten of the 20 tax years before the tax year in question, not on where they were born or intend to settle. This changes who is caught by IHT and how existing planning needs to be reassessed.

Business property relief and agricultural property relief have also been severely restricted. From 6 April 2026, only the first £2.5m of combined business and agricultural property qualifies for 100% relief, with 50% relief above that, while the nil-rate band and residence nil-rate band stay frozen until the end of the 2030/31 tax year.

Add to that the well-known traps around the residence nil-rate band, the risk of a gift with reservation of benefit unravelling years after it was made, and the strict time limits on post-death planning such as deeds of variation, and it becomes clear why getting IHT planning right protects family wealth, while getting it wrong creates exactly the liabilities it was meant to avoid.

What This Report Covers

In ten chapters and more than 40 worked examples, this 2026/27 guide will show you how to:

• Understand the shift from domicile to residence and determine who qualifies as a 'long-term UK resident'
• Work through the nil-rate band, its transferability and how cumulation affects lifetime and death transfers
• Structure a will so it is clear which beneficiaries bear the IHT on specific gifts and which bear it out of the residue
• Avoid 'bunching' of estates between spouses that can wipe out an otherwise available residence nil-rate band
• Make full use of the downsizing addition where a home has been sold, downsized or given away before death
• Use exemptions and reliefs in the right order to maximise their combined effect
• Identify when a gift with reservation of benefit is at risk of unravelling, and structure co-ownership of the family home to avoid it
• Use lifetime trusts effectively for minors, including bare trusts and their IHT treatment
• Structure life insurance, loan trusts and single premium bonds to keep proceeds outside the estate
• Use disclaimers, deeds of variation and discretionary will trusts to reshape an estate after death
• Apply deathbed planning techniques to make the most of unused exemptions and reliefs
• Plus much more…

How IHT is charged on lifetime gifts and on death

The long-term UK resident test that replaced domicile, including how long it applies after someone leaves the UK, and the difference between exempt transfers, chargeable lifetime transfers and PETs. The report works through taper relief, cumulation and the transferable nil-rate band, and explains why the recipient of a failed PET, not the donor, is primarily liable for the tax.

Exemptions and reliefs, including BPR and APR

How to make full use of the annual exemption, the often underused normal expenditure out of income exemption, which has no monetary ceiling, and dispositions for family maintenance. It also covers the spouse exemption and its £325,000 limit where only the donor is a long-term UK resident, the order in which to apply exemptions, quick succession relief and the new £2.5m limit on 100% business and agricultural property relief.

The residence nil-rate band

Why it is not as available as often thought: who counts as a lineal descendant, what counts as a home, and how the unused band passes to a surviving spouse or civil partner but not to a cohabitee. The report shows how the taper on estates over £2m can wipe out the band when estates are 'bunched' on the first death, and how the downsizing addition works where a home has been sold or given away.

Reservation of benefit and the family home

Why a gift the donor continues to enjoy is still taxed as part of their estate, why there is no safe period, and the let-outs, from paying a market rent to outright gifts of cash, which may fall under the pre-owned asset rules instead. For the family home, the report explains the little-known co-ownership provision that lets a parent give away a share of the home while parent and child both live there, and what happens if the child moves out.

Trusts for minors, life insurance and loan trusts

The IHT treatment of discretionary, interest in possession and excluded property trusts after 6 April 2025, and why a bare trust, which is created as a PET and has no ten-yearly or exit charges, suits parents and grandparents providing for minors, despite its drawbacks at age 18. The report also covers writing life policies in trust to fund the IHT, and loan trusts that keep future growth outside the estate.

Wills and post-death planning

How to draft a will so the IHT falls where intended, why a home left on a discretionary will trust loses the residence nil-rate band, and when a nil-rate band discretionary trust still makes sense. The final chapter covers disclaimers, deeds of variation and discretionary will trusts, each with a two-year time limit, and deathbed planning, from the limits on gifts by an attorney to securing the CGT uplift on death.

Who Will Benefit From This Report?

This guide is essential reading for anyone wanting to better understand the inheritance tax changes introduced since the October 2024 Budget, and how to plan around them, whether they are passing on family wealth during their lifetime or by will, providing for children and grandchildren, or dealing with an estate as an executor or beneficiary after a death.

It is equally valuable for accountants and tax practices advising clients on estate and succession planning under the new residence-based regime.

About Malcolm Finney

Malcolm Finney BSc (Hons), MSc (Bus Admin), MSc (Org Psych) previously worked for international tax consultancy JF Chown & Co Ltd, was head of international tax at Grant Thornton, and was head of tax at law firm Nabarro Nathanson. He also ran his own international tax practice for five years.

He has been advising clients based in the UK and overseas on taxation matters for over 35 years and has been a prolific speaker at tax conferences around the world. He has written numerous articles for a variety of tax journals and authored a number of books on both domestic and international tax matters.