Quick answer: Inheritance tax over 2 million requires proactive planning: use nil‑rate bands, Residence NRB taper awareness, Business/Agricultural reliefs, lifetime gifts, trusts, and insurance where suitable.

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When your estate exceeds £2 million, inheritance tax (IHT) planning becomes a sophisticated exercise—especially for high net worth families with assets in the millions. The stakes are high, and the right strategies can mean the difference between preserving generational wealth and facing a substantial tax bill. Here’s how affluent individuals and families can approach IHT reduction, with practical examples and pitfalls to avoid.

Understanding the Challenge

For estates valued above £2 million, the standard IHT rate of 40% applies to assets above the nil-rate band (NRB). The residence nil-rate band (RNRB) is tapered for estates over £2 million, meaning you lose £1 of RNRB for every £2 your estate exceeds the threshold. This can result in a significant increase in your IHT liability, especially if your wealth is tied up in property, business interests, or international assets.

Key Strategies for Reducing IHT on Large Estates

1. Business Property Relief (BPR) and Agricultural Property Relief (APR)
If you hold qualifying business assets—such as shares in AIM-listed companies, private businesses, or agricultural land—these can attract up to 100% relief from IHT. For example, a high net worth individual with £1.5 million in AIM shares and £800,000 in farmland could see these assets pass to heirs free of IHT, provided the qualifying conditions are met.

It’s vital to review the nature of your holdings regularly, as not all business or agricultural assets qualify. Keep detailed records of ownership and ensure the assets meet the criteria at the time of death.

2. Regular Gifting from Surplus Income
Gifting from surplus income is a powerful way to reduce your taxable estate, especially if you have significant annual income from investments, property, or business. These gifts must be regular, come from income (not capital), and leave you with enough to maintain your usual standard of living.

For instance, a family with £500,000 annual income from a property portfolio could gift £100,000 per year to children or grandchildren, provided they keep meticulous records showing the gifts are from surplus income. Over a decade, this could remove £1 million from the estate, with no IHT due on those gifts.

3. Will Planning: Life Interest and Discretionary Trusts
Trusts are a cornerstone of high net worth estate planning. A life interest trust allows you to provide for a spouse or partner while ultimately passing assets to children, protecting family wealth and controlling how it’s used. Discretionary trusts offer flexibility, letting trustees decide how and when beneficiaries receive assets.
For example, a £2.5 million estate might place £1 million in a discretionary trust for grandchildren, ensuring funds are protected from divorce, bankruptcy, or poor financial decisions. Trusts can also help manage the impact of RNRB tapering and provide control over complex family arrangements.

4. Whole-of-Life Insurance Written in Trust
Liquidity is often overlooked in large estates, especially when wealth is tied up in property or business interests. A whole-of-life insurance policy, written in trust, can provide a tax-free lump sum to cover the IHT bill, preventing forced sales of cherished assets.
Suppose a family owns a £3 million London townhouse and a £1 million art collection. By arranging a £1.2 million whole-of-life policy in trust, the heirs have the funds to pay IHT without selling the home or artwork.

Common Pitfalls for High Net Worth Estates

• Residence NRB Tapering:
  Once your estate exceeds £2 million, the RNRB starts to reduce. If your main residence is worth £2.5 million, you may lose the RNRB entirely, increasing your IHT bill by up to £140,000. Consider restructuring your asset mix or using trusts to keep the estate below the threshold.
  
  

• Illiquid Estates:
  Wealth tied up in property, private equity, or art can create liquidity problems. Without planning, heirs may be forced to sell assets quickly, often below market value. Review your estate’s liquidity and consider insurance or staged asset sales.
  
  

• Cross-Border and Non-Dom Spouse Issues:
  International families face additional complexity. If your spouse is non-domiciled, the usual spouse exemption may not apply, and cross-border assets can trigger unexpected tax liabilities. Specialist advice and careful structuring are essential.

A Real-World Example

Consider a £3.2 million estate comprising £1.2 million in AIM shares, £1 million in London property, and £1 million in cash and investments. The owner used BPR to exempt the AIM shares from IHT, made regular gifts of £50,000 per year from surplus income, and arranged a £500,000 whole-of-life policy in trust.
When the owner passed away, the estate’s IHT bill was reduced by over £300,000, and the insurance policy provided immediate liquidity for the heirs. No assets had to be sold under pressure, and the family home remained in the family.

Final Thoughts

High net worth estate planning is about more than just minimising tax—it’s about protecting your legacy, providing for loved ones, and ensuring your wishes are respected. The right combination of reliefs, gifting, trusts, and insurance can dramatically reduce your IHT bill and safeguard your wealth for future generations.

If your estate is valued in the millions, take time to review your options, keep detailed records, and plan for both tax and liquidity. With careful preparation, you can turn a potential tax headache into a lasting family advantage.

Disclaimer: This blog post provides general information for educational purposes only. It is not legal, medical, financial or tax advice. Outcomes can vary based on your personal circumstances.