Passing wealth to the next generation is one of the most significant financial planning tasks facing high-net-worth families. The UK's inheritance tax regime — a 40% charge on estates above the nil-rate band — means that without planning, a large portion of accumulated wealth will be lost to tax on death. But planning takes time, requires consistent action over many years, and must be done correctly to be effective.
This guide sets out the main tools available, how they work, and the trade-offs involved.
The Starting Point: Understanding the IHT Position
Inheritance tax (IHT) applies at 40% to the value of your estate above the nil-rate band (NRB), currently frozen at £325,000 until at least April 2031. A residence nil-rate band (RNRB) of £175,000 applies where you leave a home to direct descendants, giving a combined £500,000 per individual or £1,000,000 for a married couple on the first death.
For most HNW families, these thresholds are quickly exceeded. A couple with a £3 million estate facing IHT would, without planning, face a potential liability of approximately £800,000 (though the exact figure depends on asset composition and how the nil-rate bands are applied).
IHT is charged on the value of your estate at death. Anything transferred out of your estate before death — if done correctly and in sufficient time — reduces the potential charge.
The Seven-Year Gift Rule
The most straightforward wealth transfer strategy is outright gifting. Gifts to individuals are known as Potentially Exempt Transfers (PETs) and work as follows:
- On making the gift: no immediate IHT charge
- If the donor survives 7 years: the gift falls entirely outside the estate and no IHT applies
- If the donor dies within 7 years: the gift becomes chargeable:
- Within 3 years of death: full 40% rate applies (minus any available NRB)
- 3–4 years: taper relief reduces effective rate to 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
Taper relief reduces the IHT rate on the gift itself, not the value of the gift. And it only applies once the gift exceeds the NRB — so its practical benefit is limited for those without significant other planning.
The key discipline for outright gifting is to act early. A 70-year-old in good health who begins gifting today has a strong chance of surviving seven years and seeing those gifts leave the estate entirely.
What Can Be Gifted?
Any asset can be gifted: cash, shares, property, business interests. The gift must be absolute — you must genuinely give up the asset and derive no continuing benefit from it. Retaining use or enjoyment creates a Gift with Reservation of Benefit (GROB), which means the asset remains in your estate regardless of how long ago it was gifted.
Annual Exemptions: Small but Underused
HMRC provides several annual exemptions for gifts that are immediately outside the estate, regardless of the seven-year rule:
- £3,000 annual exemption: available to every individual; unused amounts can be carried forward one year (maximum £6,000 in a single year if the previous year's was unused)
- Small gifts exemption: £250 per recipient, to any number of people, provided no other exemption is used for the same person
- Wedding and civil partnership gifts: £5,000 from a parent, £2,500 from a grandparent or party to the wedding, £1,000 from anyone else
- Normal expenditure out of income: potentially the most powerful exemption; gifts that are regular, made from surplus income (not capital), and do not affect the donor's standard of living are immediately exempt from IHT. This can cover significant annual sums for those with large incomes relative to outgoings
Many families fail to systematically use these exemptions. Over a decade, a couple using all their annual exemptions, wedding gifts for grandchildren, and normal expenditure out of income can transfer hundreds of thousands of pounds outside the estate without the seven-year wait.
Trusts
Trusts allow assets to be transferred out of your estate while retaining some degree of control over how those assets are used. They are more complex and more expensive to administer than outright gifts, but they are appropriate where:
- Beneficiaries are minors or not yet financially responsible
- There is uncertainty about who should benefit
- You want to protect assets from divorce or creditors of the beneficiary
- You want to make an IHT-efficient gift while retaining some family governance
Discretionary Trusts
The most flexible form of trust. Trustees have discretion over who benefits, when, and how much. IHT treatment:
- On establishment: if the value transferred to the trust exceeds the available NRB (£325,000), an immediate 20% charge applies to the excess (a lifetime charge)
- 10-year anniversary charge: 6% of the trust fund value above the NRB at each 10-year anniversary
- Exit charge: when assets leave the trust, a proportionate exit charge applies (based on the time elapsed since the last 10-year charge)
For most families, the strategy is to establish discretionary trusts within the NRB to avoid the immediate entry charge, and to top them up over time as the NRB resets or is shared between trusts.
Loan Trusts and Discounted Gift Trusts
More sophisticated IHT planning vehicles that combine elements of gifting and retaining access. A discounted gift trust allows the settlor to receive regular payments during their lifetime while immediately removing a discounted portion of the gift from the estate. These products are appropriate for those who need continued income but want to begin the IHT planning process. Specialist advice is essential.
Family Investment Companies
A family investment company (FIC) is a private limited company owned by family members, used to hold and grow investments in a tax-efficient way. The structure typically works as follows:
- Founding generation: loans funds to the company (retaining a debt which can be repaid without IHT) or contributes via share structure
- Adult children and grandchildren: hold ordinary shares (entitled to dividends and capital growth over time)
- Investment growth: accumulates within the company, taxed at corporation tax rates (19%–25%) rather than personal income tax rates (up to 45% on investment income)
- Distributions: company can pay dividends to shareholders when commercially appropriate, at dividend tax rates (8.75%–39.35%) which are lower than income tax
The FIC does not immediately remove capital from the estate (the founding generation's loan remains an estate asset until repaid), but it does enable future growth to pass to the next generation without IHT — because the ordinary shares (which capture the growth) are held by the children from the outset.
FICs work best where:
- The founding generation has investable capital and can afford to lock it into a company structure
- There are adult children who can hold shares appropriately
- The investment strategy is long-term (10 years or more)
- The company is well-administered (accounts, minutes, shareholder agreements)
FICs are not a secret weapon. HMRC is aware of them and monitors their use. The structure must be correctly documented and the shares must be genuine — not artificial value-shifting devices.
Business Property Relief
Business Property Relief (BPR) provides 100% IHT relief on qualifying business assets, including shares in unquoted trading companies and AIM-listed shares held for at least two years.
For business owners, BPR is one of the most powerful IHT planning tools available. The business can pass to the next generation entirely free of IHT (subject to the trading requirement being met).
Important 2026 update: the Autumn Budget 2024 originally announced that 100% BPR would be capped at £1 million from April 2026, but the government raised this to £2.5 million per estate in December 2025. Qualifying business and agricultural assets above £2.5 million attract only 50% relief, not 100% (a 20% effective IHT rate), and the £2.5 million allowance is transferable between spouses and civil partners. AIM and other unlisted shares attract only 50% relief and do not use the £2.5 million allowance. This significantly affects large business owners and those with substantial AIM share portfolios. Planning ahead of this change — which is now in force — is critical. See our dedicated article on Business Property Relief for full detail.
Pensions as an Inheritance Tool
Until April 2027, pension funds do not form part of your estate for IHT purposes. A pension that is not drawn down in your lifetime passes to your nominated beneficiaries outside the estate, free of IHT. This makes the pension the optimal account from which to fund retirement last — use ISAs, property income, and other assets first, and leave the pension intact for the next generation.
From April 2027, unspent pension funds will be included in estates for IHT. The rules are still being finalised, but the principle is clear: the IHT advantage of pensions will diminish. Reviewing your pension nomination, drawdown strategy, and overall estate plan now — in advance of 2027 — is strongly advisable.
Life Assurance in Trust
A whole-of-life assurance policy, written in trust for the benefit of your children or grandchildren, provides a tax-free lump sum to pay an IHT liability on your death — or simply to pass additional wealth to the next generation.
When written in trust, the policy proceeds:
- Fall outside your estate for IHT (no estate inclusion as they belong to the trust)
- Are not subject to probate delays (the trust can pay out immediately)
- Can be structured to pay the estate's IHT bill, avoiding the need for executors to sell assets to fund the tax
Whole-of-life premiums can be expensive for older or less healthy policyholders, but the structure is highly efficient for those who qualify at reasonable premium levels.
Equalisation and Communication
Any estate plan that treats children materially differently — or that is not communicated during the donor's lifetime — creates significant risk of family conflict. Research consistently shows that inheritance disputes correlate strongly with lack of communication, not merely with the size of the estate.
Practical recommendations:
- Hold a family conversation about the estate plan while you are able to do so
- Ensure that the plan is perceived as fair — not necessarily equal in value, but equitable in intent
- Put the plan in writing (a letter of wishes alongside your will, updated periodically)
- Review the plan every three to five years and after any significant life event (marriage, divorce, death of a beneficiary)
How Global Investments Can Help
Intergenerational wealth transfer planning requires coordinating gifts, trusts, investment structures, insurance, pension planning, and estate documents — often across multiple jurisdictions for internationally mobile families. It is not a one-time exercise but an ongoing process that evolves as your family, assets, and tax rules change.
Global Investments works with families at different stages of this process: those beginning to think about IHT for the first time, those reviewing existing plans in light of the 2024 Budget changes, and those navigating complex multi-jurisdiction estates.
Tax rules, and particularly IHT rules, have changed significantly in recent years and will continue to do so. The information in this article reflects the position as at June 2026. It is provided for general information only and does not constitute legal, tax, or financial advice. Please take professional advice specific to your circumstances before making any wealth transfer decisions.
To discuss your family's wealth transfer planning, please contact our team.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.