Getting your tax affairs in order before death means knowing what your estate is worth, what inheritance tax would be due on it, and taking steps while you can to reduce that bill and make things simpler for your family. For many business owners the answer has changed recently, because of new limits on business relief and the inclusion of pensions in estates from April 2027.
Inheritance tax is charged at 40 percent on the value of an estate above the available allowances. With planning, much of it can often be reduced.
The allowances
- Nil rate band: £325,000 per person.
- Residence nil rate band: up to £175,000 per person where a home passes to children or grandchildren. It is reduced by £1 for every £2 the estate exceeds £2 million.
- Spouses and civil partners: anything left to a spouse is exempt, and unused allowances pass to the survivor.
Both bands are frozen until April 2031. A married couple can therefore pass on up to £1 million between them free of inheritance tax, if the conditions are met. The rate falls to 36 percent if at least 10 percent of the estate goes to charity.
A worked example
A married couple own a home worth £650,000, savings and investments of £350,000, and pension funds of £300,000. On the first death everything passes to the survivor, with no tax.
If the survivor dies after April 2027, the pension funds are likely to be included in the estate, giving a total of £1,300,000. The combined allowances are £1,000,000, so £300,000 is taxable at 40 percent. The bill is £120,000.
Before the pension change, the same estate would have been £1,000,000 and no tax would have been due. This is why many people who previously had no exposure now need to look again.
Business and farm owners
Shares in an unquoted trading company and business assets have long qualified for 100 percent business property relief. From 6 April 2026, 100 percent relief for business and agricultural property is capped at £2.5 million per person, with 50 percent relief above that. Unused allowance can pass to a spouse. AIM shares now get 50 percent relief.
A business owner with a company worth £4 million would have £1.5 million relieved at 50 percent, leaving £750,000 chargeable, or £300,000 of tax, before any other allowances. Succession, the shareholdings of each spouse and life insurance all need reviewing.
Lifetime gifts
Gifts made during your lifetime can reduce the estate.
- Annual exemption: £3,000 a year, with one year's unused amount carried forward.
- Small gifts: up to £250 per recipient a year.
- Wedding gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
- Normal expenditure out of income: regular gifts from surplus income, which leave your standard of living unaffected, are exempt immediately. Good records are essential.
- Larger gifts: these drop out of the estate if you survive seven years. Taper relief reduces the tax on the gift if death occurs between three and seven years.
Gifts of assets other than cash, such as shares or property, can trigger capital gains tax at the time of the gift, so check before giving them away.
Practical housekeeping
Planning is not only about tax. Your executors will find things far easier if you have:
- an up-to-date will, reviewed after any major change in family or finances
- lasting powers of attorney for financial and health decisions
- pension nomination forms that reflect your wishes
- life insurance written in trust, so the payout is outside the estate
- a list of assets, accounts, advisers and passwords stored safely
- your own tax returns up to date, with any past errors corrected
What to do
- Estimate your estate today, including pensions, and the inheritance tax that would be due.
- If you own a business or farm, check how the £2.5 million cap affects you and your spouse.
- Use the annual and small gift exemptions each year, and record any regular gifts from income.
- Review your will, powers of attorney and pension nominations.
- Take legal advice on wills and trusts alongside tax advice.
If you would like us to estimate your position and talk through options, book a free call.
