Inheritance Tax (IHT) planning has become an increasingly important part of many long-term financial plans. Rising asset values and static nil rate bands mean that many more estates are becoming liable to IHT, and this trend is set to continue; however, with the right planning, IHT liabilities can be reduced or eliminated. One of the most critical — and sometimes overlooked — aspects of effective IHT planning is to ensure that plans remain flexible. A plan that is efficient today may not remain so in the future, and overly rigid arrangements can quickly become outdated and ineffective.
Legislative change
By retaining flexibility, financial plans can remain effective in the face of evolving family circumstances, fluctuating asset values, and most importantly, changes in legislation. The decision to adjust the reforms to Business Relief and Agricultural Relief, which was announced quietly on 23rd December, is a very recent reminder of the need to remain flexible when planning to reduce or avoid an IHT bill.
In the 2024 Budget, Chancellor Rachel Reeves announced a new combined limit of £1m for assets that qualify for Agricultural Relief and Business Property Relief, scheduled to come into force in April 2026. This represents a notable change to the current position, where there is no limit on which qualifying assets can obtain full relief.
Under the proposals announced in the 2024 Budget, qualifying assets under £1m would continue to benefit from 100% relief from IHT, whilst qualifying assets above this level will only benefit from 50% relief, leaving such assets subject to an effective rate of IHT of 20%.
This was seen as a punitive move for those holding agricultural assets or family businesses and drew widespread criticism. The new £1m allowance would also not be transferable between spouses, which would pose difficulties where assets were held jointly.
In the Budget of November 2025, the proposed rules were tweaked to allow the transfer of allowances between spouses from April 2026. Shortly afterwards, the Government announced a further revision to the rules, increasing the allowance which qualifies for full relief from £1m to £2.5m.
Further upheaval expected
The introduction and revision of the limits to Business and Agricultural Relief are not the only legislative curveball that financial plans will need to negotiate. Unused pension funds will fall within the scope of IHT from April 2027, and individuals holding uncrystallised pensions, or funds in Flexi-Access Drawdown, will need to consider the impact of this change on their IHT position in just over 12 months’ time. Options to mitigate the impact of additional IHT that may become payable include drawing additional funds to either spend or make gifts or arrange non-pension assets in a different structure to reduce the overall impact. As every situation is unique, we strongly recommend that you take independent and tailored advice to ensure that any actions taken do not have unintended consequences.
Changing circumstances
When making financial plans to reduce or avoid an IHT bill on death, it can be easy to forget that our personal and family circumstances often change over time. For example, when gifts are made to the next generation, that “family wealth” could potentially be lost should the recipient of the gift enter divorce. Trusts that name individual beneficiaries may not include the flexibility to include the birth of a new grandchild or great-grandchild. Individuals who make substantial outright gifts may potentially have need of the gifted funds for their own personal use if an unforeseen emergency arises.
Keeping plans flexible allows sensible planning to take place, which can adapt to changes in circumstances.
Fluctuating asset values
It is important to adopt a flexible approach when considering the value of assets that may be liable for IHT. Asset values are rarely static and increases in the value of investments or property could mean that rigid IHT plans are less effective. Likewise, the receipt of an inheritance may push estate values above IHT thresholds and lead to a higher tax liability.
It is not, however, just increases in value that need to be considered. Long-term care, where cumulative costs can run into many hundreds of thousands of pounds, could dramatically reduce the value of an estate, meaning IHT planning undertaken to mitigate a potential issue may not have been necessary.
Retaining control
One of the main barriers to effective IHT planning is the fear of losing control. Understandably, many are reluctant to make large lifetime gifts or enter arrangements that permanently restrict access to capital or income in later life.
Assets that seek to qualify for Business Relief are one potential solution, as these investments allow access to capital should funds be needed for any purpose. Loan Trust arrangements could also be a flexible solution. By loaning rather than gifting funds outright, the loan can be repaid should circumstances change and access to funds is needed. Finally, making regular small gifts to family, rather than large lump sums, can allow the donor to suspend or stop gifting altogether if circumstances change.
A tailored approach
The most effective IHT strategy is often one that employs more than one mitigation tool, and in our experience, a combination of different actions can be both effective and flexible. By use of annual gift exemptions, and making gifts out of surplus income, rising estate values can be kept in check. Combining this with Business Relief investments, Trust planning and possibly protection strategies too, can ensure plans remain flexible to adapt to changing circumstances, whilst offering effective IHT mitigation.
Finding the right combination of strategies, which retains flexibility and provides the necessary tools to mitigate IHT, calls for an individual approach designed to meet your needs, the composition of your assets, and family circumstances. Our experienced advisers can provide bespoke advice on solutions and strategies from across the whole of the market and also review existing arrangements. Speak to one of the team to start a conversation.
