For many people, the principle behind inheritance tax planning sounds straightforward: if you have more wealth than you are likely to need, giving some of it away during your lifetime may reduce the tax eventually payable by your estate. In practice, however, parting with a substantial amount of money can feel anything but straightforward.

Over the years, we have worked with several clients in their late 70s and early 80s who were concerned about inheritance tax and wanted more of their wealth ultimately to pass to their families. At the same time, they were understandably reluctant to give away money they might need themselves. They naturally worried about what might happen if their expenditure increased, if they required care, if investment returns were disappointing, or how the surviving partner would cope if household income fell following a death.

Three clients recently came to us with versions of this exact dilemma. On the surface, their situations looked remarkably similar. Yet, as we explored their wider financial positions, the planning led to three entirely different approaches.

Before looking at inheritance tax, could they simply enjoy more of their wealth?

Our starting point with inheritance tax planning isn’t necessarily a trust or another tax-planning arrangement. One of the first questions is much simpler: could you afford to spend more and enjoy the money yourself?

This reflects an important theme in Scott Gallacher’s 50 Today 100 Tomorrow: financial planning should not become so focused on preserving money for the future that we overlook what that money can do for us during our lifetime. For someone who has accumulated substantially more than they are likely to need, spending more could mean travelling, improving their home, pursuing interests, enjoying experiences with family, or simply becoming more comfortable spending the wealth they have worked hard to accumulate.

There can also be an inheritance tax benefit, because money genuinely spent during your lifetime is no longer part of your estate. Indeed, our own inheritance tax planning guide starts with “Spend and Enjoy It”, while recognising the importance of retaining sufficient resources for long-term needs and unforeseen expenditure. For some clients, that may be enough.

For others, spending significantly more simply doesn’t appeal. The next question is therefore whether they would like to help children or grandchildren during their lifetime. That might mean contributing towards a house purchase, helping grandchildren, or simply passing on some wealth at a point when their family can make good use of it.

But there is an important consideration: once money has genuinely been given away, you should not plan on getting it back. For our three clients, this was the difficulty. They wanted to undertake generational wealth planning, but each had a different reason for wanting to retain some financial security.

Client A: “Our inheritance tax problem is relatively modest today, but what if our estate keeps growing?”

Our first clients had an estate worth just under £1 million. Inheritance tax was becoming a consideration, but their potential liability was relatively modest. They were therefore uncomfortable making a substantial outright gift purely to reduce a tax bill that was not yet particularly significant.

The longer-term position concerned us more. If they retained all their capital and their investments continued to grow, a relatively modest inheritance tax issue today could become considerably larger over the years ahead. They wanted to address that future growth, while still knowing that their original capital remained available should their circumstances change.

The planning approach

For these clients, we used a Gift and Loan Trust, with approximately £250,000 loaned to the trust.

The clients made a small initial gift to establish the arrangement and then loaned the larger sum. The outstanding loan remained an asset of the clients and potentially part of their estate for inheritance tax purposes. Importantly for them, however, it could also be repaid if they needed the money.

Future investment growth within the trust belonged to the trust rather than the clients. The objective was not therefore to remove £250,000 from their estate immediately. Instead, the arrangement helped address the potential future growth of that money, while preserving access to the original loan. For clients with a relatively modest inheritance tax concern who were nervous about giving capital away, that distinction was important.

Client B: “We’re comfortable giving capital away, but we’d still like to receive something from it.”

Our second clients had an estate of approximately £1.5 million and a more significant inheritance tax concern. They were comfortable with the principle that a substantial amount of their wealth could ultimately pass to the next generation.

Their hesitation was different. They had spent many years accumulating their wealth and did not particularly like the idea of transferring a large sum away and receiving nothing from it for the rest of their lives. They could afford to give up access to some capital, but they still wanted that wealth to contribute towards their lifestyle.

The planning approach

For these clients, we used a joint Discounted Gift Trust of approximately £500,000.

The arrangement allowed them to gift the capital while retaining predetermined withdrawals of around £20,000 a year. Depending on the client’s circumstances, a Discounted Gift Trust may also provide an immediate inheritance tax benefit. Factors including age, health and the level of withdrawals can affect how much of the original gift may be treated as immediately outside the estate, with the remaining gift then subject to the relevant gifting rules. The remaining gift is then subject to the relevant gifting rules.

There was an important trade-off. Unlike Client A, they no longer retained access to the underlying capital they had gifted, and the withdrawals were established at the outset. Their wider financial plan, however, gave them confidence that they could afford to make that commitment. What mattered to them was that the capital could begin moving towards the next generation while they continued to receive regular withdrawals during their lifetimes.

The inheritance tax concern was similar to Client A’s. What they needed from their wealth was different.

Client C: “What happens if one of us dies and our pension income falls?”

Our third clients had an estate worth more than £1.5 million and were also concerned about inheritance tax. They wanted more of their wealth ultimately to pass to their family, but when we looked at their wider financial position, an important issue emerged.

A significant part of their household income came from one client’s final salary pension. While both clients were alive, their retirement income was comfortable. If the pension holder died first, however, the pension income payable to the surviving spouse would reduce substantially.

That changed the planning discussion. Based solely on their current joint income and capital, it might have appeared that they had considerable surplus wealth available to give away. But financial planning needed to consider the position after the first death as well. If guaranteed income fell, the surviving spouse could become much more reliant upon capital. Understandably, that made both clients nervous about making a large irrevocable gift.

The planning approach

For these clients, we used Flexible Reversionary Trusts. Because the arrangements were established individually rather than jointly, approximately £250,000 was placed into an arrangement for the husband and £250,000 into a separate arrangement for the wife.

A Flexible Reversionary Trust can allow someone to undertake generational wealth planning while retaining rights to potential benefits at specified points in the future. HMRC describes these arrangements as involving a series of policies placed into trust while the person establishing the trust retains rights to specified future benefits. Those benefits become payable if the individual is alive when the relevant payment falls due, although the trustees can defer or defeat those retained rights.

For our clients, the important point was not the technical structure itself. It was the additional flexibility. Their concern was not simply whether they had enough money today. They wanted their planning to recognise the possibility that the survivor could have a greater need for capital following the first death. That made their circumstances different from both Clients A and B.

The same inheritance tax concern doesn’t always mean the same solution

These three clients had much in common. They were later in life, had accumulated significant wealth, were concerned about inheritance tax, and wanted more of their money ultimately to benefit their families. They were also all reluctant, for different reasons, to simply give substantial amounts away.

But their priorities were different:

For Client A, the priority was addressing future growth without surrendering access to their original capital.

For Client B, giving up access to capital was acceptable, provided they could continue receiving regular withdrawals.

For Client C, the possibility that the survivor’s income could fall substantially meant future flexibility was particularly important.

The tax concern was similar but the financial planning was different.

What does this illustrate?

Inheritance tax planning shouldn’t begin with a product or a trust. It should begin with understanding what you want your money to do—whether that means spending more to enjoy your wealth today, helping children or grandchildren while you are alive to see the benefit, retaining enough capital to ensure your own long-term financial security, or protecting your household income if a partner dies first.

Crucially, it requires asking how comfortable you would feel if money you had given away was no longer available should your circumstances change.

Only once those questions have been considered does it make sense to look at the different planning arrangements available. As these three clients demonstrate, there is no single inheritance tax strategy that can simply be applied across the board. The appropriate approach depends entirely on what each client needs from their wealth: continued access to capital, regular withdrawals, or greater flexibility for an uncertain future.

That is why we prefer to think of this as generational wealth planning, rather than inheritance tax planning in isolation. The aim is not simply to reduce a future tax bill. It is to find a sensible balance between enjoying your wealth today, maintaining your own financial security, and passing wealth to the people who matter to you.

Frequently asked questions

Do I have to give money away to reduce inheritance tax?

Not necessarily.

Before considering more technical planning, it may be worth looking at whether you could spend more of your wealth yourself or make direct gifts to family.

Other planning arrangements may also be available where someone is uncomfortable simply making an outright gift.

The appropriate approach depends on your financial position, future needs and what you want to achieve.

Can I undertake inheritance tax planning while retaining access to some of my money?

In some circumstances, yes.

For example, a Gift and Loan Trust can allow the person establishing it to retain the right to repayment of the original loan, although that outstanding loan remains potentially within their estate for inheritance tax purposes.

Other arrangements work differently, which is why it is important to consider the client’s wider financial position rather than choosing an arrangement based solely on the potential tax saving.

Can I make a gift but continue receiving withdrawals?

Certain arrangements, such as a Discounted Gift Trust, can provide predetermined withdrawals after capital has been gifted.

However, the client gives up access to the underlying gifted capital, and the withdrawals are normally established at outset.

Whether that is appropriate depends on the individual’s wider circumstances and future financial needs.

Why might two people with similar estates need different inheritance tax planning?

The value of the estate is only part of the picture.

Two clients with similar levels of wealth can have very different sources of income, expenditure needs, family circumstances, attitudes towards gifting and requirements for future access to capital.

As these three cases demonstrate, apparently similar inheritance tax concerns can therefore lead to different planning approaches.

Important information

The clients featured in this case study have been anonymised and some identifying details and figures have been rounded or changed to protect confidentiality.

The examples are intended to illustrate the financial planning process and should not be treated as financial, tax or legal advice.

Trust and inheritance tax planning can be complex, and the suitability and tax treatment of any arrangement depend on individual circumstances and the rules applying at the time. Appropriate advice should be sought before taking action.