Inheritance Tax planning: legal ways to reduce the bill

Inheritance Tax (IHT) is charged at 40% on estates above the available allowances, and frozen thresholds mean more families are affected each year. Much of it can be reduced with straightforward, legitimate planning. This guide sets out the main options, roughly in order of how widely they apply.

1. Make a will that uses all the allowances

Without a will, intestacy rules decide who inherits, which may not be tax-efficient. A will can:

• make sure the spouse exemption is used where wanted, and that any unused nil-rate band transfers to the survivor
• leave the family home to direct descendants, so the residence nil-rate band of up to £175,000 is available
• avoid leaving the home into trusts that would lose the residence nil-rate band
• direct business and farm assets so both spouses’ £2.5 million relief allowances are used

For a married couple, the nil-rate bands (2 × £325,000) and residence nil-rate bands (2 × £175,000) together shelter up to £1 million, if the estate is not over £2 million. See nil-rate band and residence nil-rate band.

2. Use the gift exemptions every year

Some gifts are exempt immediately:

• £3,000 annual exemption, plus one year carried forward
• £250 small gifts to any number of people
• wedding gifts up to £5,000 from a parent
• regular gifts from surplus income, without limit

A couple who use their annual exemptions for 20 years remove £120,000 from their estates, saving up to £48,000 of IHT. See gift exemptions.

3. Make larger gifts early

Outright gifts to individuals are potentially exempt transfers: they fall out of the estate if you survive seven years, and taper relief reduces tax on large gifts after three years. The earlier you give, the better. Remember:

• you cannot keep a benefit from the gift, such as living rent-free in a house you gave away
• gifts of assets other than cash can trigger Capital Gains Tax
• you need to be sure you can afford to give the money away

See potentially exempt transfers.

4. Insure the tax

A life insurance policy written in trust pays out to beneficiaries outside your estate. It can be used to:

• cover the IHT that would fall due if you die within seven years of a large gift (a decreasing term policy)
• provide funds to pay the expected IHT bill on the second death of a couple (a joint life, second death whole-of-life policy)

Premiums paid from surplus income are usually exempt gifts.

5. Give to charity

Gifts to charities are exempt. If you leave at least 10% of your net estate (after the nil-rate band) to charity, the rate on the rest of the estate falls from 40% to 36%. For some estates this means the family receives almost as much while a meaningful sum goes to good causes.

6. Plan around pensions

Pensions have long been outside the estate. From 6 April 2027, most unused pension funds and death benefits will count towards the estate for IHT. That changes the old advice to spend other savings first and leave pensions untouched:

• review whether to draw more from pensions during life, considering Income Tax
• check nominations and the impact on the residence nil-rate band taper
• coordinate pension planning with gifts and life insurance

See pension tax relief.

7. Business and agricultural relief

Qualifying business and farm assets get 100% relief on the first £2.5 million (combined, per person) from April 2026, with 50% relief above, and the allowance is transferable between spouses. Owners of family companies and farms should check their wills and structures make full use of it. AIM shares now get 50% relief. See Business Property Relief and Agricultural Property Relief.

8. Trusts

Trusts can help control how wealth passes on, for example for young grandchildren or a vulnerable relative, but gifts into most trusts above the nil-rate band are taxed at 20%, and trusts have their own ongoing charges. See trusts and Inheritance Tax.

9. After death: deeds of variation

Beneficiaries can redirect an inheritance within two years of death using a deed of variation, which can be treated as made by the deceased for IHT. Common uses are skipping a generation, or redirecting part of an estate to charity to reach the 10% threshold.

What to avoid

Be cautious of schemes that promise to remove IHT through complex structures, offshore arrangements or contrived property ownership. HMRC targets marketed avoidance, and many schemes fail under the gift with reservation or pre-owned assets rules, leaving families with tax, interest and costs. Take advice from a qualified adviser.

Frequently asked questions

How can I reduce Inheritance Tax legally?

Make a will that uses all available allowances, give regularly within the exemptions, make larger gifts early, leave money to charity, insure the expected tax and plan pensions and business assets carefully.

How much can a couple leave tax-free?

Up to £1 million, using two nil-rate bands of £325,000 and two residence nil-rate bands of £175,000, if the home goes to direct descendants and the estate is not over £2 million.

Will my pension be subject to Inheritance Tax?

From 6 April 2027, most unused pension funds and death benefits will be included in the estate for Inheritance Tax.

Is giving my house to my children a good way to avoid Inheritance Tax?

Only if you move out or pay them a full market rent. If you keep living there rent-free, the house stays in your estate under the gift with reservation rules.