IHT Guide For a £2 Million + Estates
When an estate’s value approaches or exceeds £2 million, the landscape for Inheritance Tax (IHT) planning shifts significantly. While many of the foundational strategies remain relevant and unafected, a critical rule comes into play that can dramatically alter the potential tax bill. For high-value estates, understanding this nuance is the first step towards creating a truly effective plan to protect your legacy.
At Soteria Trusts, we guide professionals and their families through these complexities, ensuring they are positioned to make the most of their assets while minimising tax burdens. An estate valued at £2 million requires a more sophisticated approach than simply relying on standard allowances.
The £2 Million Threshold and the Residence Nil-Rate Band
The most important factor to understand is the tapering of the Residence Nil-Rate Band (RNRB). The RNRB is an additional allowance of £175,000 per person (for the 2025/26 tax year) available when a main residence is passed to direct descendants, such as children or grandchildren. For a couple, this can mean an extra £350,000 of tax-free inheritance for their beneficiaries.
However, for estates valued over £2 million, this allowance begins to reduce. The rule change states that for every £2 the estate’s net value is over the £2 million threshold, the RNRB is reduced by £1.
Let’s consider the impact on an individual with an estate worth exactly £2 million.
- Estate Value: £2,000,000
- Excess over Threshold: £0
- RNRB Available: Full £175,000
Now, consider an estate worth £2.1 million.
- Estate Value: £2,100,000
- Excess over Threshold: £100,000
- RNRB Reduction: £50,000 (£100,000 ÷ 2)
- RNRB Available: £125,000 (£175,000 – £50,000)
- Total NRB & RNRB: £325,000 + £125,000 = £350,000
By the time an individual’s estate reaches £2.35 million, the entire RNRB is lost. For a couple, this threshold is £2.7 million before their combined £350,000 RNRB is completely eroded. This tapering effect can result in an unexpected tax increase of up to £140,000 for a couple, making proactive management and mitigation essential.
Strategies to Mitigate IHT on a £2 Million Estate
The primary goal for an estate of this size is often to bring its value below the £2 million taper threshold, thereby preserving the full Residence Nil-Rate Band. Achieving this requires a multi-faceted approach.
Reducing the value of your estate during your lifetime remains one of the most powerful IHT planning tools.
1. Strategic Gifting
- Annual Exemption: You can gift £3,000 per tax year. A couple can gift £6,000. If unused from the previous year, this can be carried forward once, allowing a couple to gift £12,000 in a single year.
- Small Gifts Exemption: You can give as many gifts of up to £250 per person as you wish each tax year, as long as you have not used another exemption on the same person.
- Gifts from Surplus Income: This is a particularly effective but often underused exemption. If you can make regular gifts from your post-tax income without impacting your standard of living, these gifts are immediately outside your estate for IHT purposes. For high earners, this can be a significant way to reduce an estate’s value over time. Proper record-keeping is crucial to prove the gifts are regular and made from surplus income.
2. Potentially Exempt Transfers (PETs)
For larger gifts that fall outside annual exemptions, the seven-year rule applies. If you make a gift to an individual and survive for seven years, the gift which starts off being ‘potentially exempt’ becomes fully exempt from IHT. If you pass away within this period, the value of the gift is added back into your estate for IHT calculation purposes. Taper relief applies if death occurs between three and seven years after the gift was made. For a £2 million estate, making a substantial gift could bring the value below the taper threshold, but it’s a strategy that depends on timing and your life expencancy.
3. Utilising Trusts
Trusts offer a sophisticated way to manage assets, control their distribution, and reduce the value of your personal estate.
- Discounted Gift Trusts: This involves placing a lump sum into a trust. You retain the right to a fixed, regular income for life, while the initial capital and any growth are immediately outside your estate for IHT purposes (subject to the value of your retained income rights).
- Loan Trusts: You can loan money to a trust, which the trustees then invest. Any growth on the investment belongs to the trust and is outside your estate. You retain the right to have your original loan repaid if needed, providing flexibility.
- Discretionary Trusts: Placing assets into a discretionary trust can remove them from your estate, though this is typically considered a Chargeable Lifetime Transfer (CLT) and may incur an immediate 20% IHT charge on amounts over the £325,000 nil-rate band. However, it provides excellent control and protection for beneficiaries.
4. Family Investment Company
Another effective solution, especially for those aiming to retain control over assets while managing inheritance tax exposure, is the use of a Family Investment Company (FIC). An FIC is a bespoke, company-based structure where family members can hold shares and receive returns aligned with their personal circumstances and the family’s goals. Unlike trusts, an FIC allows you to acquire new and consolidate existing investment assets—such as property portfolios, shares, or cash—within a limited company, which can then be passed on to the next generation in a controlled manner.
The chief advantage of an FIC is the ability to gift shares to family members, effectively reducing the value of your personal estate for IHT purposes while maintaining overall control through voting rights. Furthermore, FICs can offer tax efficiency, flexibility in income distribution, and protection of family wealth from external risks. For professionals or families with substantial investments and a desire to tailor their IHT planning, a Family Investment Company can be a robust, long-term solution.
If you’d like to learn more, you can explore how an FIC might suit your situation here: Family Investment Company.
5. Business Property Relief (BPR)
For business owners, BPR can be invaluable. Investments in qualifying unlisted companies or shares on the AIM market can become 100% exempt from IHT after being held for just two years. This allows you to retain control of your capital while sheltering it from tax, making it a powerful tool for estates hovering around the £2 million mark.
6. Life Insurance Written in Trust
While this doesn’t reduce the IHT bill itself, a whole-of-life insurance policy written in trust can provide a tax-free lump sum to your beneficiaries specifically to cover the IHT liability. This ensures that other assets, such as the family home, do not need to be sold to settle the tax bill. Other types of life insurance contracts such as PPLI, can be used to shelter assets from IHT.
Planning for an Estate Worth £2 Million
Planning for an estate of £2 million plus demands foresight and expert guidance. The interaction between the various allowances and the RNRB taper threshold creates a planning “sweet spot” where small adjustments can yield significant tax savings. By combining lifetime gifting, trusts, strategic investments and insurance, you can effectively manage your estate’s value and ensure your legacy is passed on as you intend.
