Part 1 of a two-part series on inheritance tax (IHT) by Andrew Hamilton, Chartered Tax Adviser.
A short history of death taxes
I am old enough to remember the precursor of IHT: Estate Duty (1894 to 1975). Estate Duty taxed the deceased’s estate at progressively higher rates — the larger the estate, the higher the rate. The largest estates suffered rates as high as 75%, leading to the break-up of many aristocratic estates and country houses.
Then, in 1975, along came Capital Transfer Tax: a tax on transfers of wealth whether the donor was alive or dead. It was replaced by Inheritance Tax in 1986.
In a curious way, IHT is not dissimilar to Estate Duty. Both apply, or applied, mainly to transfers on death, and both fall most heavily on landowners and the owners of private companies. The difference lies in how they are applied: where Estate Duty was a sledgehammer, IHT is governed by a complex web of exemptions and reliefs — and from 6 April 2026, that web has changed significantly.
IHT in a nutshell
IHT is generally charged at 40% on the value of an estate above the available tax-free allowances. Many homeowners can leave up to £500,000 free of IHT, comprising the £325,000 nil-rate band and the £175,000 residence nil-rate band (RNRB). The RNRB only applies where a qualifying residence is left to direct descendants, and it is tapered away for estates worth more than £2 million. Married couples and civil partners can often leave up to £1 million free of IHT by transferring unused allowances to the surviving spouse. Both bands are frozen until at least April 2030.
Reducing IHT legitimately: lifetime gifts
The simplest and most effective planning tool remains the lifetime gift: give assets away, survive seven years, and they fall outside your estate. Simple in principle — but two traps catch people out.
Trap one: capital gains tax
Disregarding a few exemptions and reliefs, capital gains tax (CGT) applies to all disposals — whether by sale or by gift. Give away an asset standing at a gain and you may trigger a CGT bill with no sale proceeds to pay it. For certain business assets, holdover relief can defer the gain; we cover the wider CGT landscape in our article on capital gains tax.
Trap two: gifts with reservation of benefit
You have not made a gift for IHT purposes unless you give up all benefit from the asset. The classic example is giving your home to your children while continuing to live in it rent-free. The gift is real enough — but for IHT purposes the home is treated as remaining in your estate. To avoid the trap, you must pay a full market rent and then survive seven years from the date of the gift. Some donors take out term life assurance to cover the risk of dying within the seven-year window.
(For CGT, a gift of your main residence is normally covered by private residence relief — although your children will not enjoy that relief on a property they do not live in.)
Business Property Relief: the new rules from 6 April 2026
Until 5 April 2026, qualifying trading businesses and farms attracted 100% relief from IHT with no upper limit, generally subject to two years’ ownership (seven years for farmland let to others). From 6 April 2026, the rules changed fundamentally. The Government originally proposed capping 100% relief at £1 million; after sustained representations from family businesses and the farming community, it announced in December 2025 that the threshold would instead be £2.5 million, which is what the Finance Act 2026 enacted.
| Qualifying business and agricultural property | Relief from 6 April 2026 |
|---|---|
| First £2.5 million (combined APR and BPR allowance) | 100% relief — no IHT |
| Value above £2.5 million | 50% relief — an effective IHT rate of 20% |
Key points to note:
- The £2.5 million allowance covers the combined value of property qualifying for 100% business property relief and agricultural property relief.
- The owner must generally have held the assets for at least two years to qualify.
- Any unused allowance is transferable to a surviving spouse or civil partner — and where the first death occurred before 6 April 2026, the full £2.5 million is treated as available. A couple can therefore shelter up to £5 million of qualifying assets at 100%.
- “Business property” means an interest in a trading business — a sole trade, a partnership share or shares in an unquoted trading company. Investment businesses generally do not qualify.
- Shares quoted on AIM now receive 50% relief in all cases.
- IHT attributable to qualifying property can be paid in equal annual instalments over ten years, interest-free.
Full details of the reforms are published on GOV.UK.
A worked example: Arthur’s estate
The mechanics are easier to grasp through a worked example. Arthur is a widower who has recently died. His estate includes an 80% shareholding in Bogg Holdings Ltd, an unquoted trading company worth £10 million in total; Arthur’s share is worth £8 million, and he had owned it for 25 years. His late wife died in 2024, leaving everything to him (an exempt transfer between spouses). He leaves his entire estate to his three children.
| 80% shareholding in Bogg Holdings Ltd | £8,000,000 |
| Main residence | £750,000 |
| Investment property | £500,000 |
| Other assets | £150,000 |
| Gross estate | £9,400,000 |
| Less: bank loan | (£200,000) |
| Net estate | £9,200,000 |
Because the estate far exceeds £2 million, the residence nil-rate bands are fully tapered away. However, Arthur benefits from his own £2.5 million allowance and his late wife’s transferred allowance — £5 million of 100% relief in total.
| Shares in Bogg Holdings Ltd | £8,000,000 |
| Less: 100% relief (2 × £2.5m allowances) | (£5,000,000) |
| Less: 50% relief on the £3m balance | (£1,500,000) |
| Chargeable business property | £1,500,000 |
| Rest of estate (£9.2m less £8m) | £1,200,000 |
| Less: nil-rate bands (2 × £325,000) | (£650,000) |
| Less: residence nil-rate bands (tapered to nil) | £0 |
| Chargeable balance of estate | £550,000 |
| IHT at 40% on £2,050,000 | £820,000 |
Total IHT of £820,000 represents around 8.9% of the £9.2 million net estate — and the tax attributable to the shares can be spread over ten annual interest-free instalments. (Figures are simplified for illustration.)
Before 6 April 2026, the shares would have attracted unlimited 100% relief and the bill would have been £220,000: the reform costs Arthur’s family an extra £600,000. Had Arthur taken advice in his lifetime, options such as lifetime gifting with CGT holdover relief and a family investment company could have reduced the impact considerably.
Eight common IHT mistakes
- Confusing Business Property Relief (BPR, an IHT relief) with Business Asset Disposal Relief (BADR, a CGT relief).
- Making a lifetime gift without considering insurance against death within seven years.
- Gifting the family home but continuing to live in it rent-free.
- Forgetting the £2 million taper: the residence nil-rate band is withdrawn for larger estates.
- Assuming all business assets qualify for BPR — investment businesses generally do not.
- Overlooking the CGT consequences of lifetime gifts.
- Not making a will.
- Assuming that making a gift automatically removes the asset from your estate.
Coming in Part 2
This article has concentrated on lifetime gifting and Business Property Relief. In Part 2 I will look at other legitimate planning measures — regular gifts out of surplus income and charitable legacies — together with the biggest change on the horizon: from April 2027, most unused pension funds are due to be brought within the IHT net. In the meantime, our articles on estate planning and the 2025 IHT reforms provide further background.
Important information
This article is for general information only and does not constitute personal advice or a recommendation. Tax treatment depends on individual circumstances and may be subject to change. The Financial Conduct Authority does not regulate tax advice, estate planning or will writing. If you would like advice on your own position, please contact Hamilton.
Andrew Hamilton Dip PFS, Chartered Tax Adviser — July 2026
