Estate Planning for High Net Worth Individuals UK (2026): Strategies for Estates Over £1 Million

For large estates, the basic nil-rate band allowances are typically insufficient — but they still apply as the starting point: (1) STANDARD ALLOWANCES: NRB £325,000 per person (frozen to 2030). For a married couple: combined NRB £650,000. RNRB up to £175,000 per person (conditions: residential property + direct descendant). For a married couple: combined RNRB up to £350,000 (if conditions met). Total potential threshold (married couple): up to £1,000,000; (2) RNRB TAPER ABOVE £2 MILLION: the Residence Nil-Rate Band reduces by £1 for every £2 by which the net estate exceeds £2 million. For the combined estate of both spouses: (a) At £2 million net estate: full RNRB available = £350,000; (b) At £2.175 million: RNRB reduced by £87,500 = £262,500 remaining; (c) At £2.35 million: RNRB eliminated entirely. For an estate of £2.35m, the available threshold is only £650,000 (NRB alone) — the entire RNRB is lost. The taper catches many families with property in London and the South-East where house prices have risen significantly; (3) CALCULATING THE TAPER: net estate = the gross estate minus debts and liabilities (excluding the value of exempt transfers — i.e., the spouse exemption does NOT reduce the taper calculation on the first death. HMRC uses the value of the estate before any spouse exemption for the taper test on the first death, which means the RNRB taper is effectively based on the combined estate position); (4) IHT BILL ILLUSTRATION: estate £3m (married couple, home passes to children). Allowances: £650k (NRB) + £0 (RNRB — eliminated). Chargeable estate: £2.35m. IHT at 40%: £940,000. After 10% charitable legacy (reducing to 36% rate): chargeable estate £2.115m × 36% = £761,400 IHT + £235,000 charitable gift. Total benefit to children: £3m - £761,400 - £235,000 = £2,003,600 vs £3m - £940,000 = £2,060,000 without charity. Note: in this case the 10% charity reduction does NOT help the family — the loss to charity (£235k) exceeds the IHT saving (£178k). The 36% rate benefit is most powerful when the chargeable estate is close to the 10% threshold.

Business Property Relief (BPR) and Agricultural Property Relief (APR) were significantly reformed by the Autumn Budget 2024 (Finance Act 2025/2026), with the changes taking effect from 6 April 2026: (1) THE PRE-APRIL 2026 POSITION: BPR provided 100% IHT relief (100% reduction in the chargeable value) for qualifying business interests — typically: unquoted shares in trading companies; interests in qualifying partnerships; business assets used in a qualifying business. APR provided 100% (or 50%) relief on agricultural land and buildings; (2) THE CHANGE FROM 6 APRIL 2026: a combined BPR/APR allowance of £1 million per person is exempt at 0% (100% relief — unchanged). ABOVE £1 million in qualifying business/agricultural assets: relief reduced to 50% (the net chargeable rate is 20%, not 40%). The change applies per person, not per family. For a married couple, each has their own £1m allowance; (3) IMPACT ON FARMING AND BUSINESS FAMILIES: a farming family with £2m of agricultural land and buildings — before April 2026, IHT = £0 (100% APR). After April 2026 — first £1m: 0%. Excess £1m: 50% relief = 20% rate = £200,000 IHT. This is a substantial change for larger farms and businesses; (4) AIM-LISTED SHARES: shares on AIM (Alternative Investment Market) previously qualified for 100% BPR after a 2-year holding period. The same £1m cap and 50% relief above now applies; (5) PLANNING OPPORTUNITIES: (a) Lifetime gifts of BPR assets: if qualifying business assets are gifted during lifetime and the donor survives 7 years, the gift is a PET and avoids IHT entirely — without any annual cap. The £1m cap only applies on death; (b) Multiplying the allowance: where a business is held jointly by spouses, each spouse's shares qualify separately for the £1m cap. Ensuring appropriate ownership division between spouses is now more important than before; (c) Will structuring: where business assets exceed £1m, consider whether a will trust (discretionary or life interest) should hold the business interest on death to manage the IHT through trust elections; (d) Consider selling: where an owner is planning retirement, selling the business and reinvesting in a non-chargeable asset may result in less IHT exposure than retaining the business for 20% IHT relief.

The normal expenditure out of income exemption (IHTA 1984 s.21) is often described as the 'forgotten' IHT exemption — but for high-income individuals it is one of the most powerful available: (1) THE RULE: gifts made out of surplus income as part of a regular pattern are exempt from IHT — with no annual limit and no 7-year clock. Compare this to PETs (potentially exempt after 7 years) and the annual exemption (£3,000/year). The s.21 exemption applies immediately, without any waiting period; (2) CONDITIONS: the exemption requires: (a) the transfer must be made out of income (not capital); (b) the transfer must form part of a normal, regular, habitual pattern — not a one-off gift; (c) after making the transfer, the donor must retain sufficient income to maintain their usual standard of living; (3) WHAT COUNTS AS INCOME: pension income, rental income, employment income, investment income (dividends, interest). Income from trusts may count. The income must be genuinely surplus — the donor must not need to draw on capital to maintain their lifestyle after making the gifts; (4) HOW TO DOCUMENT IT: the exemption requires evidence. HMRC forms IHT403 (gifts and other transfers) require the executor to demonstrate the pattern. Best practice: maintain a spreadsheet or letter each year recording: income received; normal living expenditure; surplus; gifts made; statement that gifts form part of normal expenditure pattern; (5) TYPICAL STRUCTURE FOR HIGH NET WORTH: a retired person with a defined benefit pension (£30,000/year), rental income (£20,000/year), and a comfortable lifestyle spending (£25,000/year) could gift the surplus (£25,000/year) under s.21 — completely IHT-free. Over 10 years: £250,000 removed from estate at zero IHT cost. This is significantly more efficient than PETs (which require 7 years before full exemption); (6) COMBINATION WITH ANNUAL EXEMPTION: the s.21 exemption is separate from and in addition to the annual £3,000 exemption. Both can be used in the same year on different gifts; (7) NOT AVAILABLE FOR EVERYONE: where income is modest and lifestyle costs are high, there may be no genuine surplus. The exemption cannot be manufactured by reducing lifestyle expenditure artificially — the standard of living comparison is to the donor's normal living standard.

A Family Investment Company (FIC) is a private limited company controlled by senior family members but where economic interest is progressively transferred to the next generation: (1) STRUCTURE: the founding generation (parents/grandparents) typically holds preference shares (carrying fixed income rights; full voting rights; nominal economic value) or retains as a non-voting shareholder. Children/grandchildren hold ordinary shares (minimal voting rights; all economic value). The FIC holds investment assets — typically shares, bonds, property, or cash; (2) IHT MECHANISM: the founding generation gifts the ordinary shares (carrying economic value) to the children during lifetime. These gifts are PETs — if the donor survives 7 years, they are fully IHT-exempt. Meanwhile the donor retains control through voting rights. The preference shares in the founding generation's estate have minimal value for IHT (they carry no economic upside); (3) SHARE DISCOUNTS: minority shareholdings and shares with restricted rights may be valued at a discount to their proportionate net asset value for IHT purposes (minority discount; lack of control discount; lack of marketability discount). These discounts can reduce the IHT value of retained shares; (4) INCOME DISTRIBUTION: dividends can be paid to family members in lower income tax brackets, reducing the overall family tax burden. Parents in the 45% additional rate bracket can pay dividends to children at 8.75% or 33.75% (basic/higher rate dividend rates); (5) COSTS AND DRAWBACKS: (a) Setup costs: legal (£10,000-50,000+); stamp duty on asset transfer to company; CGT on transfer of chargeable assets into company; SDLT on property transfer; (b) Ongoing costs: accountancy; corporation tax (25% on profits); corporation tax returns; (c) Loss of CGT principal private residence relief on main home (cannot be held in FIC); (d) HMRC scrutiny: HMRC reviews FIC structures closely. If the structure is artificial — the founding generation retains effective access to income and capital — HMRC may challenge it; (6) WHO IT IS SUITABLE FOR: typically estates over £3-5m where: the founding generation has significant investment assets; children are adults; the family can sustain 7+ years to allow PETs to become exempt; there is appetite for professional advice and ongoing administration.

The Finance Act 2024 brings pension death benefits into the IHT estate from April 2027. For high net worth individuals with large defined contribution (DC) pension funds, this is one of the most significant planning opportunities of the decade: (1) THE CHANGE (APRIL 2027): unused DC pension funds and lump sum death benefits from DC pensions will be included in the estate for IHT from April 2027. Pension trustees will be responsible for reporting and paying IHT on death benefits. Before April 2027: a £500,000 DC pension passes IHT-free. After April 2027: the same £500,000 DC pension may face 40% IHT (£200,000 charge) after applying available NRBs; (2) PRE-APRIL 2027 PLANNING: (a) DRAWDOWN AND GIFTING: drawing down pension funds (taxable as income at marginal rate — typically 20-45%) and making PET gifts to family members. If the donor survives 7 years, the gift is IHT-exempt. The trade-off: income tax on drawdown vs IHT saved. For higher-rate (40%) taxpayers: 40% income tax on drawdown + 0% IHT (after 7yr PET) vs 0% income tax (no drawdown) + 40% IHT. For a £200,000 pension: drawdown + gift costs £80,000 income tax but saves £80,000 IHT (if PET exempt after 7yr). If the donor dies within 7yr, the PET claws back — net loss vs no action; (b) DRAWDOWN + ANNUAL GIFTS: use drawdown proceeds for normal expenditure out of income (s.21) or annual exemption (£3,000) gifts — no 7yr clock; (c) SPEND DOWN PENSION: use pension funds to fund lifestyle, care home fees, or gifting out of income rather than drawing on estate assets — leaves more estate assets for children but reduces pension IHT exposure; (d) REVIEW PENSION NOMINATIONS: after April 2027, nominating a surviving spouse (IHT-exempt recipient under s.18) for the pension death benefit will defer rather than avoid the IHT (same as current position for estate assets). Nominating children directly may or may not be advantageous depending on the combined estate position; (3) DB PENSIONS: less affected — death benefits under DB schemes are typically lump sum (covered by expression of wishes; the April 2027 change applies) and dependent's pension (not a lump sum; different treatment). Review DB pension rules specifically; (4) TIMING: the window before April 2027 is now less than 12 months. Professional tax advice from a pension specialist or IFA is strongly recommended for any HNW individual with DC pension funds above £500,000.