Estate Planning Considerations 

Estate planning has become increasingly important in the UK, particularly as frozen thresholds and rising asset values draw more estates into the inheritance tax (IHT) net. Without proactive planning, a significant portion of your wealth may pass to HMRC rather than your intended beneficiaries.

This section explores the key estate planning considerations , with a focus on gifting strategies, exemptions, and the interplay between IHT and capital gains tax (CGT).

Navigating Inheritance Tax (IHT) on Death

IHT is typically charged at 40% on the value of a person’s estate above the nil-rate band, which remains frozen at £325,000 as of November 2025. For many estates, this threshold is easily exceeded — particularly when property, investments, and business assets are involved.

Upon death, the seven-year rule becomes central to determining how past gifts are treated:

• Gifts made within seven years before death are classified as Potentially Exempt Transfers (PETs).
• If the donor survives seven full years, the gift becomes exempt from IHT.
• If the donor dies within seven years, the gift may be added back into the estate for IHT calculation.
• Taper relief may reduce the IHT due on gifts made between three and seven years before death, but it does not reduce the value of the gift added to the estate.

Strategic gifting is therefore a core tool in managing IHT exposure — but timing and documentation are critical.

Immediate Tax Considerations: Capital Gains Tax on Gifts

While gifting assets can reduce the size of your estate and lower your IHT liability, it may trigger an immediate CGT charge, especially for non-cash assets such as:

• Property (other than your main residence)
• Shares
• Valuable personal items (e.g. antiques, art)

Unlike IHT, which is only assessed on death (or under certain trust transfers), CGT applies at the time of the gift, calculated based on the market value of the asset at the point it is transferred.

This is why gifts into trusts are often used strategically. Trusts can help defer or plan around CGT exposure, although they bring their own IHT implications (such as the 20% entry charge if the transfer exceeds the nil-rate band). Due to the layered tax implications, any significant gift should be reviewed carefully — and professional advice is essential before making irreversible decisions.

Gifts That Are Completely Exempt from IHT

Some gifts are entirely exempt from IHT regardless of value or timing. The most common include:

1. Charitable Gifts

Any gifts made to UK-registered charities (and some overseas charities) are fully exempt from IHT, whether made during lifetime or on death.

• Charitable legacies in your Will reduce the taxable value of your estate.
• If 10% or more of your net estate is left to charity, the IHT rate on the rest of the estate is reduced from 40% to 36%.

This exemption offers a route to philanthropic giving with both financial and tax planning benefits.

Annual Exemptions and Small Gift Reliefs

The UK tax system allows for several smaller exemptions which, when used annually and consistently, can form part of a broader gifting strategy.

1. Annual Exemption (£3,000)

Every individual can gift up to £3,000 per tax year without it being counted as a PET. If unused, this allowance can be carried forward one tax year, allowing a couple to gift up to £12,000 jointly in certain cases.

• This exemption is applied before any PETs
• It is useful for smaller gifts or cash transfers to children or grandchildren

2. Small Gift Exemption (£250)

You can gift up to £250 per recipient, per tax year, to any number of individuals, provided they have not already received part of your £3,000 annual exemption.

This exemption is often overlooked but can be used to make tax-free gifts to wider family members or friends — especially during festive periods or special events.

Note: Neither the £3,000 annual exemption nor the £250 small gift exemption reduces the value of the estate at the date of death unless the gifts are made more than seven years before death. But they do prevent those gifts from being added back into the IHT calculation later.

Gifts Between Spouses and Civil Partners

Gifts to your UK-domiciled spouse or civil partner are fully exempt from IHT — both during your lifetime and on death.

This is a key exemption that enables spouses to pass assets between each other without tax implications, although:

• If the recipient spouse is non-UK domiciled, the exemption is capped at £325,000
• Any unused nil-rate band from the first spouse to die can be transferred to the surviving spouse, doubling their IHT threshold on second death (up to £650,000, or more with residence nil-rate band)

This transferability allows effective inter-spousal planning to delay or reduce the total IHT due when both partners have passed.

However, gifts to spouses increase the recipient’s estate, which could result in a larger IHT charge on their eventual death — so long-term planning should account for the full family picture.

Using Reliefs: Business and Agricultural Property

If you’re planning to gift business interests, shares, or agricultural property, you may be eligible for valuable reliefs that can reduce IHT exposure significantly:

1. Business Property Relief (BPR)

Up to 100% relief may be available on:

• Shares in an unlisted trading company
• Sole trader or partnership business assets
• Certain shareholdings in AIM-listed companies

To qualify, the assets must have been owned for at least 2 years and used in a qualifying business.

2. Agricultural Property Relief (APR)

Up to 100% relief on agricultural land and buildings used for farming — available if the land has been occupied for farming purposes for at least 2 years (owner-occupied) or 7 years (let out).

These reliefs can allow tax-free gifting of significant assets — but they come with conditions and must be reviewed regularly to ensure qualification.

Gifts in Consideration of Marriage or Civil Partnership

Gifts made on or shortly before a marriage or civil partnership are exempt from IHT, subject to the relationship and amount:

• £5,000 from a parent
• £2,500 from a grandparent or great-grandparent
• £1,000 from anyone else

These must be made before the ceremony and clearly linked to the event. They can also be combined with other annual exemptions.

The “Normal Expenditure Out of Income” Exemption

One of the most powerful — yet often misunderstood — exemptions is for gifts made from surplus income.

This exemption applies when:

• The gift is made regularly (e.g. annually, monthly)
• The funds come from after-tax income, not capital
• The gift does not affect your standard of living

It is commonly used for:

• Regular payments to adult children or grandchildren
• Funding life insurance premiums in trust
• Paying school or university fees

To qualify, good record-keeping is essential. You must be able to demonstrate that:

• The gifts form part of your normal expenditure
• Your income exceeds your outgoings after the gifts
• The pattern is consistent and sustainable

This exemption has no financial limit — meaning it can be used to transfer substantial sums over time without any impact on the estate’s IHT calculation.

Final Thoughts

In 2025/26, estate planning isn’t just about writing a Will. It’s about understanding the interaction between gifting rules, exemptions, CGT, and IHT, and applying them in a structured, documented way.

The earlier you start, the more options you have — whether it’s gradually transferring wealth to your children, reducing the size of your estate, or using corporate and trust vehicles to protect family wealth.

At Merranti, we help individuals and families:

• Plan lifetime gifting strategies around income and capital
• Use trusts and companies where appropriate
• Structure asset ownership to maximise IHT reliefs
• Prepare for both intergenerational transfer and long-term care
• Keep compliant with HMRC reporting and documentation rules

Ready to start your estate planning?
Book a confidential Estate Review with Merranti — and build a plan that protects your legacy.