Planning for the worst revisited: how common estate and succession planning strategies are changing

The UK's tax landscape is undergoing one of its most significant shifts in decades. The series of reforms – some already legislated, others progressing through Parliament – mean that traditional strategies for wills, lifetime gifting, pensions and succession planning should be revisited. For individuals and families facing these challenges, the landscape has never been more complex; equally there remains a strong set of tools for clients and their advisers to use to manage an effective succession.

This article summarises the major changes and explores practical strategies to help clients and their advisers navigate this new era of estate and succession planning. The list of practical strategies is far from exhaustive but is intended to serve as a useful reminder of the most popular and commonly used options that remain available.

This article is relevant to both long-time UK residents and those with a more international profile; however, the focus is on long-term residents, ie those who have been UK tax resident for at least 10 out of the 20 previous UK tax years. For more information about the changes to the UK tax regime for non-domiciled individuals, please see: Autumn Budget 2024: practical points for non-doms and their advisers.

A rapidly changing inheritance tax (IHT) landscape

Pensions: a fundamental shift from April 2027

From 6 April 2027, most unused pension funds and lump sum death benefits will be treated as part of an individual’s estate for IHT purposes. This marks a dramatic departure from the long standing principle that discretionary pension death benefits typically fall outside IHT.

Under the new rules:

• Most unused defined contribution pension funds will be subject to IHT.
• Death in service benefits will remain outside IHT.
• Spouse/civil partner exemptions continue to apply.

This change follows government concerns that pensions have increasingly been used as intergenerational wealth transfer vehicles rather than for retirement savings.

Business Property Relief (BPR) and Agricultural Property Relief (APR): restrictions from 6 April 2026

From April, the current unlimited 100% relief for qualifying business and agricultural property will be capped. A new £2.5-m allowance will apply per individual; assets above this limit will receive relief at 50% - ie an effective 20% IHT rate.

Key points include:

• The £2.5m allowance applies to the combined value of business and agricultural property.
• Unused allowance can be transferred to a spouse/civil partner, allowing couples to pass on up to £5m at the 100% rate.
• Shares traded on certain 'not listed' markets (including AIM) will continue to qualify for relief at the effective 20% IHT rate.

This represents a major shift for business owners, farming families and investors who previously relied on uncapped BPR/APR to protect business investments.

How should clients and advisers respond? A reminder of the available tools

For those looking to change their estate and succession planning in consequence of these changes, there are many tried and tested strategies that remain viable, and many can be used together.

Make full use of the spouse exemption

Transfers between spouses remains IHT free, and with rising asset values and new BPR/APR restrictions, the spouse exemption will have even more pronounced importance because it will be one of very few ways that business/agricultural assets can be passed on without an IHT charge.

The spouse exemption is particularly useful where assets are standing at substantial gains, because assets inherited between spouses are re-based for capital gains tax (CGT) purposes at death, even if no IHT is due. The surviving spouse can then deal with the inherited assets as they wish. If they sell or gift the inherited assets shortly after receiving them, there will likely be little or no CGT to pay, although unless the donor survives seven years from the date of a gift, there is an IHT clawback (see below).

When the spouse exemption applies, inherited assets are nonetheless re-based for CGT purposes – which can be helpful.

Lifetime gifts: potentially exempt transfers

Lifetime gifting remains effective, though clients and their advisers should bear in mind the IHT exposure that gifts remain subject to for seven years under the potentially exempt transfer (PETs) rules.

Funding grandchildren’s education – via school fee support or Junior ISA contributions – remains a tax efficient way to transfer value to the next generation whilst not putting too much in their hands directly (if that is a concern).

However, lifetime gifts of non-cash assets will often trigger capital chargeable gains, with the gift treated as a disposal at open market value for CGT purposes (even though the transfer is a gift, not a sale). The CGT is payable by the donor. This can result in an effective double tax charge if the donor does not survive seven years – because both a CGT and IHT liability reduce the value available for heirs.

Donors will also need to bear in mind anti-avoidance rules – the 'Gift with a Reservation of Benefit' and 'Pre-Owned Asset Tax' rules – which are designed to prevent donors from giving away assets whilst continuing to benefit from them.

PETs-specific life insurance is available on a seven-year profile to match the potential IHT liability and is often a neat route to manage IHT risk in an estate.

Lifetime gifts: gifts out of surplus income

Gifts that an individual makes out of income that is surplus to their requirements to maintain their living standards are exempt from the PET rules. The gifts must form a regular pattern of giving, though they can vary in amount. For example, a gift to each grandchild on their birthday may be exempt from the PET rules even if the amounts change year to year.

This exemption remains a powerful tool to reduce the taxable estate over time. If this strategy is used, it is important to keep careful records and to bear in the mind that the gifted income must be genuinely surplus to the donor's requirements. This exemption can also be used to create trusts, if there is concern about putting too much value into recipients' hands.

Life insurance

In many cases, life insurance is a relatively inexpensive way to reduce the impact of IHT exposure. We recommend that policies are settled into trust both to avoid the policy proceeds being treated as part of the deceased's estate (and therefore subject to IHT at 40%) and to provide a useful source of liquidity to the executors. Because IHT must be paid before executors can apply for probate, this can create a liquidity problem; however, proceeds from a policy written in trust can usually be accessed before the Grant of Probate application.

Lifetime trusts

Due to the up-front 20% IHT charge that long-term residents (or those subject to the long-term resident tail period of up to 10 years, or those looking to settle UK-situs assets) typically face when creating lifetime trusts, subject to the nil-rate band and other exemptions/reliefs, lifetime trusts have been out of favour for some time as a lifetime planning tool. However, they can still play a useful role.

This is especially the case if the individual has substantial, regular income because the 'gifts out of surplus income' exemption also applies to gifts into trust. There is therefore no limit on the amount that can be settled into a trust free of up-front IHT provided that the donor has sufficient income to make the gifts without reducing their standard of living and that the transfers form part of a pattern of regular giving.

Importantly, assets settled into trust remain within scope of IHT but the charging regime has a different structure. Rather than a 40% tax charge at death, trusts created during lifetime are subject to a 10-yearly charge where the trust assets are subject to IHT at up to 6% every 10-year anniversary of the trust (plus exit charges at up to 6% if capital leaves the trust in other periods). Trusts created by individuals who are not long-term residents (or those subject to the long-term resident tail period) are not within the scope of this charging regime, except for UK-situated assets in the trusts.

Trusts created upon death

Assets that flow into a trust created upon death, ie created under an individual's will, are within scope of IHT upon death; however, trusts can be an incredibly useful control and succession mechanism.

Usually, a trust created by will is either a so-called 'life interest trust', where one (or more) life tenants are entitled to the trust income as it is generated during their lifetimes, but not the trust capital (which the trustees nonetheless usually have power to give to the life tenant should they need it).

Assets in a life interest trust created at death are usually treated as part of the life tenant's estate, so when the life tenant dies there will be an IHT charge on the trust assets. However, life interest trusts can create succession opportunities, particularly if the life tenant is young, because capital transfers from the trust are treated as PETs and can be transferred to younger generations without an IHT charge if the life tenant survives seven years from the date of the transfer.

Assets in other trusts created by wills, typically 'discretionary' trusts where the trustees have discretion as to the distribution of income and capital amongst the beneficiaries, are not treated as part of a beneficiary's estate but instead are subject to the 10-yearly and exit charging regime described above.

Please note that if the deceased was not a long-term resident when they died (or subject to the long-term resident tail period of up to 10 years), only their UK-situated assets will fall within the UK IHT regimes.

Re-examining pension withdrawal strategies

The 2027 reforms mean that the traditional advice – 'spend non pension assets first' – will no longer hold. In some cases, drawing lump sums earlier may reduce a future IHT charge, though this must be balanced against income tax considerations.

Ceasing UK tax residence

For individuals seeking to leave the UK tax net entirely, the up-to-10-year IHT tail now applies instead of the previous domicile based regime. While leaving the UK is never a decision driven solely by tax, the new rules do make it easier for most UK individuals to leave the IHT net compared with the old non-dom regime.

Under the old non-dom regime, for an individual's non-UK assets to be outside the scope of IHT the individual had to shed most UK connections in favour of their new jurisdiction of domicile, and they had to have a demonstrable intention to live in their new jurisdiction permanently or indefinitely. This was often unattractive due to the impact it would have on the individual's life, and there was significant risk of challenge by HMRC in marginal cases.

Under the new rules, intentions and continued connections to the UK become much less relevant: you can continue to spend significant time in the UK each year provided that you become and remain non-UK tax resident under the Statutory Residence Test. It is common for individuals to be able to spend up to 90 or 120 days in the UK whilst remaining non-UK tax resident.

Charitable giving and combined strategies

Tax policy is structured to encourage charitable donations to UK charities in three key ways:

• legacies are exempt from IHT;
• gifts may be eligible for tax relief under the Gift Aid scheme; and
• gifts do not trigger CGT on the donor even if the assets are standing at very substantial gains.

In addition, if 10% or more of an estate is left to charity, the IHT rate reduces from 40% to 36%.

For Gift Aid claims, the donor must report at least as much income to HMRC annually as the amount of the charitable donation(s). The charity claims 25 pence from HMRC for every £1 donated, ie it increases the value of gifts to the charity by 25%, and if the donor is a higher or additional rate taxpayer then they can reclaim the difference between the higher and lower rates (eg if the donor is an additional rate taxpayer, they can reclaim the difference between the 45% additional income tax rate and the 20% basic income tax rate which is 25%).

If gifting shares, the donor can also claim income tax relief on the market value of the shares, which is deductible from total taxable income.

A new era, but core principles remain

Even with pensions entering the IHT net and reliefs being capped, the fundamentals of good estate planning still apply:

• ensure wills reflect current family dynamics and avoid tax traps under current legislation;
• maintain flexibility to your affairs where possible and review your personal financial affairs regularly; and
• keep detailed records of any lifetime gifts.

However, all that said, the 'tax tail should never be allowed to wag the dog'. Ultimately, even if some strategies come with a higher tax cost, they will sometimes be better for the families concerned due to individual, family and business dynamics.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2026