Inheritance tax (IHT) is often called the UK’s most hated tax — but also one of the most avoidable with proper planning. Here’s how to legally reduce or eliminate your IHT bill.
Inheritance Tax Basics 2026/27
Current Rates and Thresholds
| Threshold | Amount | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Frozen until April 2028 |
| Residence nil-rate band (RNRB) | £175,000 | For main home to descendants |
| Single person total | £500,000 | With RNRB |
| Married couple total | £1,000,000 | Both allowances combined |
| IHT rate | 40% | On excess above threshold |
| Reduced rate | 36% | If 10%+ left to charity |
Who Pays Inheritance Tax?
Only estates above the thresholds pay IHT. In 2025/26:
- 4% of estates paid IHT
- Average IHT bill was £215,000
- Total IHT receipts: £7.5 billion
What’s Included in Your Estate
| Included | Not Included |
|---|---|
| Property | Most pension funds |
| Cash and savings | Life insurance in trust |
| Investments | Business Relief assets |
| Personal possessions | Gifts made 7+ years ago |
| Life insurance (not in trust) | Agricultural Relief assets |
| Gifts made within 7 years | Exempt gifts |
Available Allowances
Nil-Rate Band (£325,000)
Everyone gets this basic allowance:
- First £325,000 of estate is tax-free
- Unused portion transfers to surviving spouse
- Can be used against any assets
Residence Nil-Rate Band (£175,000)
Extra allowance for your home:
- Must be main residence
- Must pass to direct descendants (children, grandchildren)
- Tapers for estates over £2 million (lost by £3.5m)
- Can apply even if downsized
Direct descendants include:
- Children (including adopted and stepchildren)
- Grandchildren
- Great-grandchildren
- Not siblings, nieces/nephews, or friends
Transferable Allowances for Couples
| Situation | NRB Available | RNRB Available | Total |
|---|---|---|---|
| Single person | £325,000 | £175,000 | £500,000 |
| Widow(er) — spouse used none | £650,000 | £350,000 | £1,000,000 |
| Widow(er) — spouse used half | £487,500 | £262,500 | £750,000 |
Gift Exemptions
Annual Exemptions
| Exemption | Limit | Notes |
|---|---|---|
| Annual exemption | £3,000/year | Can carry forward 1 year |
| Small gifts | £250/person | Unlimited recipients |
| Wedding gifts (parent) | £5,000 | Per child |
| Wedding gifts (grandparent) | £2,500 | Per grandchild |
| Wedding gifts (anyone) | £1,000 | Per person |
Gifts from Income
The most powerful exemption — no limit if:
- Made from income (not capital)
- Part of regular pattern
- Normal expenditure
- Leaves enough to maintain lifestyle
Example annual gifting: | Income | £60,000 | | Living costs | -£36,000 | | Surplus income | £24,000 | | Regular gifts from surplus | £24,000 — fully exempt |
The 7-Year Rule
Gifts beyond exemptions become “potentially exempt transfers”:
| Survival Period | IHT Rate |
|---|---|
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% |
Spouse Exemptions
Transfers Between Spouses
| Transfer | IHT Status |
|---|---|
| Gifts during lifetime | Completely exempt |
| Inheritance on death | Completely exempt |
| No limit on amount | Fully exempt |
Married/civil partners only — not applicable to:
- Unmarried partners (even if cohabiting for decades)
- Siblings living together
- Other family members
Planning for Couples
First death strategy:
- Maximum to spouse is tax-free
- Preserve both nil-rate bands for second death
- Consider using bypass trusts for specific purposes
Second death strategy:
- Use any unused allowances from first death
- Maximum £1 million exemption possible
- Consider RNRB implications
Pension Planning for IHT
Pensions are one of the most tax-efficient IHT tools.
Why Pensions Are Exempt
| Feature | IHT Benefit |
|---|---|
| Not part of estate | Usually fully exempt |
| Death before 75 | Tax-free to beneficiaries |
| Death after 75 | Income tax (not IHT) on withdrawals |
| Expression of wish | Faster distribution, no probate |
Pension Strategy for IHT
- Spend other assets first — Draw from ISAs, savings before pension
- Leave pension untouched — Passes outside estate
- Name beneficiaries — Complete expression of wish form
- Consider not crystallising — Uncrystallised funds can be more flexible
Death Before vs After 75
| Age at Death | Taxation of Pension to Beneficiaries |
|---|---|
| Under 75 | Tax-free lump sum or income |
| 75 or over | Income tax at beneficiary’s marginal rate |
Business Relief (BR)
What Qualifies for Business Relief
| Asset | Relief Rate |
|---|---|
| Unquoted trading company shares | 100% |
| AIM listed shares (qualifying) | 100% |
| Business assets (sole trader/partnership) | 100% |
| Shares in quoted company (controlling) | 50% |
| Land/buildings used in business | 50% |
AIM Share Investment
Many investors use AIM shares for IHT planning:
- Must hold for minimum 2 years
- Shares must be in qualifying trading companies
- 100% business relief — effectively IHT-free
- Some investment risk involved
Note: The 2024 Autumn Budget introduced a cap on Business Relief of £1 million from April 2026, with the excess taxed at 20%.
2-Year Holding Requirement
- Assets must be held for 2 years before death
- Clock resets if you sell and repurchase
- Replacement property rules can help preserve relief
Trusts for IHT Planning
Discretionary Trusts
| Feature | Detail |
|---|---|
| Control | Trustees decide who benefits |
| IHT on setup | If over nil-rate band, 20% upfront |
| IHT periodic charges | 6% every 10 years on value over NRB |
| Exit charges | When assets leave trust |
| Uses | Protecting assets, vulnerable beneficiaries |
Life Interest Trusts
| Feature | Detail |
|---|---|
| Beneficiary | Income for life to one person |
| Remainder | Capital to someone else |
| IHT | In estate of life interest holder |
| Uses | Provide for spouse, protect for children |
Bare Trusts
| Feature | Detail |
|---|---|
| Ownership | Beneficiary owns assets absolutely |
| Control | Trustee manages until beneficiary’s age (usually 18) |
| IHT | In beneficiary’s estate |
| Tax on income/gains | Beneficiary’s rates |
Charitable Giving
Gifts to Charity
| Type | IHT Benefit |
|---|---|
| Lifetime gifts to charity | Immediately exempt |
| Legacies to charity | Reduce taxable estate |
| 10% to charity | Estate taxed at 36% not 40% |
The 36% Rate Calculation
If you leave 10% of your “baseline amount” to charity:
- Baseline = estate value minus reliefs, exemptions, and NRB
- 10% threshold = must leave at least 10% of this
- Benefit = remaining estate taxed at 36% not 40%
Example:
| Item | Amount |
|---|---|
| Estate value | £1,000,000 |
| Less: nil-rate band | -£325,000 |
| Less: RNRB | -£175,000 |
| Baseline amount | £500,000 |
| 10% threshold | £50,000 |
| Charity gift | £50,000 |
| Taxable at 36% | £450,000 |
| IHT at 36% | £162,000 |
| vs 40% (£180,000) | Saves £18,000 |
Life Insurance for IHT
Using Life Insurance
Life insurance doesn’t reduce IHT but can pay the bill:
| Option | Purpose |
|---|---|
| Whole of life policy | Guaranteed payout on death |
| Written in trust | Payout outside estate |
| Covers estimated IHT | Beneficiaries receive net estate |
Writing Policies in Trust
If life insurance is in trust:
- Proceeds paid directly to beneficiaries
- Not part of your estate
- No IHT on the payout
- Faster access (no probate)
If not in trust:
- Proceeds in your estate
- Potentially liable to IHT
- Adds to estate value
- Subject to probate
IHT Planning Checklist
Immediate Actions (Free)
| Action | Benefit |
|---|---|
| Complete pension expression of wish | Ensures pension outside estate |
| Put life insurance in trust | Keeps payout outside estate |
| Make a will | Ensures wishes carried out, RNRB claimed |
| Use annual exemptions | £3,000/year tax-free |
| Give small gifts | £250/person unlimited |
Medium-Term Actions
| Action | Benefit |
|---|---|
| Regular gifts from income | Unlimited potential |
| PETs — significant gifts | Tax-free after 7 years |
| AIM share investments | 100% relief after 2 years (up to £1m cap) |
| Review asset ownership | Optimize for allowances |
| Consider trusts | Future IHT protection |
Long-Term Review
| Action | Frequency |
|---|---|
| Estate valuation | Every 2-3 years |
| Will update | After major life events |
| Trust reviews | Annually |
| Monitor legislation | Budget announcements |
| Professional advice | Major changes or complex estates |
Planning by Estate Size
Estate Under £325,000
Usually no IHT:
- Focus on making a will
- Ensure pension nominations made
- Life insurance in trust
Estate £325,000-£500,000
Moderate planning:
- Use RNRB (home to children)
- Annual gift exemptions
- Consider life insurance
Estate £500,000-£1,000,000
Active planning recommended:
- Maximize both NRB and RNRB
- Regular gifting program
- Gifts from income strategy
- Consider AIM investments
Estate Over £1,000,000
Comprehensive planning needed:
- All above strategies
- Trust planning
- Business Relief investments
- Professional advice essential
- Review ownership structures
Common Mistakes
| Mistake | Consequence | Solution |
|---|---|---|
| Not making a will | RNRB may be lost | Make or update will |
| Pension nomination outdated | Wrong beneficiaries | Review annually |
| Life insurance not in trust | Increases estate | Set up trust |
| Gift records not kept | Exemptions not provable | Document everything |
| Gifting property but living there | Gift with reservation | Move out or pay rent |
| Waiting too long to gift | 7-year rule not met | Start early |
| Forgetting to use exemptions | Allowances wasted | Use annually |
Professional Help
When to Get Advice
| Situation | Professional Needed |
|---|---|
| Estate over £325,000 | Solicitor for will |
| Complex family situation | IHT specialist |
| Business or agricultural assets | Tax adviser |
| Trust planning | Solicitor + tax adviser |
| International assets | International tax specialist |
| Gifting property | Conveyancer + tax adviser |
Expected Costs
| Service | Typical Cost |
|---|---|
| Simple will | £150-£500 |
| Mirror wills (couple) | £250-£750 |
| Complex will with trusts | £500-£2,000 |
| IHT planning advice | £500-£3,000 |
| Trust setup | £1,000-£5,000 |
| Annual trust admin | £500-£2,000 |