Most people do not want to think about their own death and are often put off planning for the next generation for that very reason.

However, when considering later life and retirement planning, early planning is essential to reduce the inheritance tax (IHT) payable on the event of your death, ensuring that your assets go to the people you want them to, and even protecting those assets for generations to come. 

Later life and retirement planning – make sure that your Will is up to date

Making a will is the first step in making sure that your estate will be shared out as you want it to be on your death.

A valid Will not only ensures that your wishes are followed, but can also make life easier for those you leave behind who have to administer your estate.

A valid Will also ensures that any tax planning you may have undertaken is not undone by the rules of intestacy (which apply when you die without a valid Will).

Scope of IHT

Before 6 April 2025, your domicile status (in very simplified terms – your nationality) would have been a key determinant of the extent of your liability to IHT.

With effect from 6 April 2025, the extent of your liability to IHT will depend on your long-term residence status (see below).

If you are a long-term UK resident, then all the assets owned outright by you will be liable to UK IHT (i.e. whether they are in the UK or elsewhere).

If you are not a long-term resident, then (with limited exceptions) you will only be liable to UK IHT on assets situated in the UK but not assets outside the UK.

These new rules provide an opportunity for British nationals who retire abroad to significantly reduce their exposure to UK IHT.

Broadly speaking, you will be a long-term UK resident for a tax year if you were UK-resident for at least ten of the previous 20 tax years.

Later life and retirement planning – Spousal exemption – No IHT on assets left to your spouse

Married couples and civil partners can pass their assets to each other tax-free. This applies to gifts during lifetime and on death.

This means that if your Will leaves everything to your surviving spouse or civil partner, no IHT liability will arise on your death.

Any charge will effectively be deferred until the death of the surviving spouse or civil partner (giving greater opportunity to take steps to reduce your combined estates exposure to IHT).

For the purposes of this exemption, it does not matter if you are separated as long as the marriage or civil partnership is in existence, transfers from one to the other are exempt from IHT.

Later life and retirement planning – the nil-rate band

Where a spousal exemption does not apply, an IHT liability will only arise on the value of your chargeable estate in excess of the ‘nil rate band’ (NRB) and (where applicable) the ‘main residence nil rate band’ (MRNRB). We will look at the MRNRB in more detail below.

The nil rate band is currently £325,000, and this has been frozen until April 2031.

The main-residence nil rate band is currently £175,000, and this has also been frozen until April 2031.

It is possible for all, or part, of the nil rate band, which was not used on the death of a spouse or civil partner, to be transferred to the surviving spouse or civil partner.

This means that the surviving spouse or civil partner’s estate can currently be worth up to £650,000 (£1,000,000 if the residence nil-rate band applies) before any IHT is due.

The amount that can be transferred is based on the percentage of the nil-rate band that was unused when the first spouse or civil partner died and applied in the same percentage to the nil-rate band at the time of the second death.

Example

Sam dies and leaves his entire estate to his wife, Sally. If on Sally’s death, the nil-rate band is £325,000 that would be increased 100% to £650,000.

Later life and retirement planning – Reducing the value of your Estate during your lifetime – Gifting

Giving away property during your lifetime may be the best form of IHT planning – it also means you can witness your beneficiaries enjoying the gifts.

There are several types of gift that are exempt from IHT. These include the following:

• the annual exemption of £3,000 (can be carried forward for one year only);
• wedding or civil partnership gifts of £5,000 if made by a parent, £2,500 if by a grandparent and otherwise £1,000;
• gifts up to £250 (per person per tax year). This exemption cannot be used against the balance of a gift that has attracted another exemption, e.g. a wedding gift or a gift that counts towards their £3,000 annual exemption;
• the normal expenditure out of income exemption applies where an individual regularly makes gifts to, say, family members out of their surplus income. There will be no IHT as long as the individual has enough money to maintain their normal lifestyle;
• gifts to charities, museums, universities or community amateur sports clubs; and
• gifts to political parties.

For gifts which do not fall into one of the exempt categories above, a lifetime gift to an individual will be a Potentially Exempt Transfer (PET), meaning there are no immediate IHT implications.

Providing that you survive for seven years after making the gift, the amount of the gift will remain outside your estate – i.e. there will be no IHT to pay on the value of the gift.

If you were to die within seven years of making the PET, it will become chargeable but may be covered by the nil-rate band so that no tax is payable. It will, however, reduce the amount of the nil-rate band available to set against your estate on death.

Where you do not survive a gift by 7 years, taper relief is available to reduce the tax payable on the failed PET. The relief is given against the amount of tax rather than the value of the gift. The tax due is reduced on a sliding scale if the gift was made between three and seven years before your death.

Example

Jane makes a PET of £350,000 on 1 February 2022 and dies on 20 June 2025. The IHT threshold is £325,000 so the gift exceeds the threshold by £25,000.

Tax on the gift £25,000 x 40% = £10,000

Less: taper relief (gift made within three to four years of death), so 80% of the tax is due. £10,000 x 80% = £8,000.

It is important to note that the IHT liability on a failed PET is primarily that of the recipient of the gift. This means that anyone who received a gift from you in the 7 years prior to your death may have to pay IHT.

Retirement planning – IHT and your Family Home

For the majority of people, their home is their most valuable asset, and for many in London and the South East, this alone could trigger an IHT charge on death.

So what can you do to reduce or eliminate the IHT liability?

You may wish to consider giving your home away during your lifetime. In this scenario the PET rules will apply. However, it is not that simple. In order for the gift to be effective for IHT purposes (regardless of you living for seven years after the gift) you would either need to cease occupying the property, or pay a market value rent for your continued occupation of the property.

Alternatively, you may wish to consider equity release. The mortgage debt will offset some of the value of your home on death. You would then have cash to gift (as a PET) or could consider investing in assets which qualify for Business Property Relief (BPR) – see below.

Business Property Relief (BPR) & Agricultural Property Relief (APR)

There has been increased press coverage of these reliefs since changes were announced in the 2024 Autumn Budget. Those changes, which were confirmed in the 2025 Autumn  Budget, will take effect from 6^th April 2026.

Regardless of the changes, BPR and APR can significantly reduce IHT payable on death, or in some instances, on gifts assets to another person or to a trust during your lifetime.

BPR provides relief from IHT at rates of 100% or 50% depending on the type of business property.

The appropriate percentages are:

Agricultural property relief (APR) provides relief at either 100% or 50% on the agricultural value of agricultural property. Agricultural property can also include the farmhouse and farm buildings and can also extend to land and buildings that have been taken out of agricultural use that are managed under an environmental land agreement. The rate depends on the type of property.

From April 2026, 100% relief for business and agricultural property will only be available up to a combined value of £1m, with the excess qualifying for relief at only 50%.

Much like the NRB and MRNRB, you will be able to transfer any unused allowance to a surviving spouse or civil partner, giving a total of £2mn for a couple.

Retirement planning – The benefits of life assurance policies

In situations where you can’t or don’t wish to give away assets during your lifetime, you may instead wish to consider a life assurance policy which can be used to cover a future IHT liability.

Common policy types are:

• Whole of life policies – these pay out on death to cover the liability on your estate;
• Reducing term policies – these cover the IHT liability payable by a recipient of a gift you (as the donor) die within the 7-year period.

When taking out a life assurance policy, it would be sensible for the life assurance policy to be written in trust for your chosen beneficiaries. Without this, the ‘payout’ would form part of your death estate and increase the IHT payable on your death.

Additional care needs to be taken, however, as premiums paid by you under the policy will be transfers of value for IHT purposes (but may be below the amount of the annual exemption or covered by the normal expenditure out of income exemption.

Could a Trust be right for you and your family?

Trusts have in the past been extensively used in tax planning, in particular overseas trusts set up by non-domiciled individuals (prior to 6 April 2025). However, over the last two or three decades, and most recently by Finance Act 2025, successive governments have enacted ever-more complex legislation designed to prevent their use for tax mitigation purposes and this, coupled with the costs of setting up and administering a trust, mean that they are now most likely to be created with a specific, usually non-tax, objective.

Their primary purpose is for ensuring that your wealth is protected for future generations, and safeguarded by Trustees (which could be you during your lifetime and someone your Trust after your death).

A trust is a relationship that exists where a person or persons (trustees) hold property for the benefit of another or others (beneficiaries).A trust is generally created by a person, known as a settlor (or truster in Scotland), who transfers funds or other property to trustees stipulating in a trust deed or other written instrument (such as a will) the manner in which the property should be held.

Trusts may be used for a number of different purposes, for example to:

• Put assets into the hands of trustees who are better able to administer the assets than the intended beneficiaries. (This may also help to avoid family disputes);
• Separate the ownership of income and capital so that for the present income is employed for one person but the capital is held long term for another.
• Protect assets – for example where the settlor wishes to benefit family members but is not confident that they have the ability to make sensible financial decisions
• Protect vulnerable people who, because of age or disability, are unable to make their own decisions.

The tax rules around Trusts are complex, and would require specialist advice, bespoke to your personal position and objectives. Our private client team are experts in the field and would be delighted to speak with you.

Could a Family Investment Company (FIC) be a better alternative to a Trust?

A family investment company (FIC) is the term generally used to describe a UK-resident private limited company, the shareholders in which are family members, which exists in order to make or hold investments.

The investments held may comprise cash, loans, residential or commercial properties and share portfolios which are generally held in order to generate income or capital growth or a combination of the two.

This is illustrated by the image below.

One of the primary reasons that individuals choose to use trusts is so that they can retain control of or protect their assets from being dissipated by children or grandchildren who may not yet be responsible enough to assume full control, but still remove some of the value from their estate for inheritance tax purposes.

Both of these objectives may be achieved by using a FIC (and note also that the maximum life of a trust is 125 years, whereas there is no such limit for a company.

The other benefit of a FIC is that being a company, it is a ‘familiar beast’ for those of you have owned and operated companies throughout your working life.

Again, the FIC needs to be designed and implemented with you and your family in mind. Our tax teams would be delighted to start a conversation if you wanted to find out more about them and how they may work for you.

If you would like to speak to a member of our tax team or one of our independent financial advisers about retirement planning and later life planning please contact us on 020 7870 9050 or email us at hello@rpgcc.co.uk.