Inheritance tax (IHT) is charged at 40% on the value of your estate above certain thresholds. With property values high and thresholds frozen until at least 2030, more families than ever are being caught. Here are 12 legitimate strategies to reduce or eliminate your IHT bill.
For the wider cluster covering thresholds, gifting rules and calculators, use the main Inheritance Tax hub.
Current IHT Thresholds 2026/27
| Threshold | Amount | Details |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Frozen since 2009 — stays frozen until at least 2030 |
| Residence nil-rate band (RNRB) | £175,000 | Only applies when leaving your home to direct descendants |
| Individual total | £500,000 | NRB + RNRB combined |
| Married couple / civil partners | £1,000,000 | Both allowances transferable between spouses |
| Tax rate above threshold | 40% | Reduced to 36% if you leave 10%+ of net estate to charity |
Related: Inheritance Tax Guide | IHT Calculator
Strategy 1: Use Your Annual Gift Exemptions
You can give away £3,000 per tax year completely free of IHT. If you did not use last year’s allowance, you can carry it forward for one year — giving you up to £6,000.
| Gift exemption | Annual amount | Notes |
|---|---|---|
| Annual exemption | £3,000 per person | Can carry forward one unused year |
| Small gifts | £250 per recipient | Unlimited number of recipients — cannot combine with the £3,000 |
| Wedding gifts (parent) | £5,000 | One-off per marriage |
| Wedding gifts (grandparent) | £2,500 | One-off per marriage |
| Wedding gifts (anyone else) | £1,000 | One-off per marriage |
| Gifts out of normal expenditure | Unlimited | Must come from income, not capital — regular pattern required |
Gifts Out of Normal Expenditure
This is one of the most powerful but underused IHT exemptions. If you can show HMRC that:
- The gifts form a regular pattern (e.g. monthly or annually)
- They come from your income, not your savings or capital
- They do not reduce your standard of living
…then there is no limit on how much you can give away. Common examples include paying grandchildren’s school fees, regular payments into a savings account for someone, or paying life insurance premiums for your children.
Keep records: Note the date, amount, recipient, and which income funded the gift. HMRC can ask for evidence going back years.
Strategy 2: The Seven-Year Rule
Any gift that exceeds your annual exemptions becomes a potentially exempt transfer (PET). If you survive seven years, the gift dros out of your estate entirely.
| Time between gift and death | Tax rate on the gift |
|---|---|
| 0 – 3 years | 40% |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| 7+ years | 0% |
Taper relief only applies when the total gifts exceed the nil-rate band (£325,000). Below that threshold, the gifts use up your nil-rate band but are not themselves taxed.
Practical tip: Start gifting as early as possible. The earlier you begin, the more likely the seven-year rule works in your favour.
Strategy 3: Leave Your Home to Direct Descendants
The residence nil-rate band (RNRB) gives you an extra £175,000 tax-free allowance — but only if you leave your home (or a share of it) to:
- Children (including adopted and stepchildren)
- Grandchildren
- Other lineal descendants
| RNRB detail | Rule |
|---|---|
| Maximum per person | £175,000 |
| Maximum per couple | £350,000 |
| Property must be | Your residence (or former residence) |
| Left to | Direct descendants only |
| Tapering | Reduces by £1 for every £2 of estate above £2 million |
| Downsizing protection | Still available if you downsize or sell after 8 July 2015 |
If your estate exceeds £2 million, the RNRB starts to taper. It disappears entirely at £2.35 million for an individual (£2.7 million for a couple using both allowances).
Strategy 4: Transfer Unused Allowances Between Spouses
Transfers between spouses and civil partners are completely exempt from IHT — no limit.
When the first spouse dies, any unused nil-rate band and RNRB can be transferred to the surviving spouse:
| Scenario | First death used | Second death total NRB | Second death total RNRB |
|---|---|---|---|
| Nothing used | £0 | £650,000 | £350,000 |
| Half NRB used | £162,500 | £487,500 | £350,000 |
| All NRB used | £325,000 | £325,000 | £350,000 |
Maximum combined threshold: £1,000,000 (for a couple leaving their home to direct descendants with estates under £2 million).
Strategy 5: Use a Trust
Trusts can help with IHT planning, though the rules changed significantly in 2006. Common trust strategies include:
| Trust type | IHT benefit | Best for |
|---|---|---|
| Bare trust | Gift falls under 7-year rule | Simple gifts to children/grandchildren over 18 |
| Discretionary trust | Chargeable transfer — uses NRB but keeps control | Protecting assets, vulnerable beneficiaries |
| Life interest trust | Surviving spouse benefits, then passes to children | Second marriages, blended families |
| Loan trust | Freezes value in estate — growth benefits trust | Estate freezing while retaining capital |
| Discounted gift trust | Immediate IHT reduction while retaining income | Those who need ongoing income from capital |
Important: Setting up a trust incorrectly can create unexpected tax bills. Always use a solicitor experienced in trust and estate planning.
Related: Trusts Explained
Strategy 6: Use Your Pension
Pensions are one of the most tax-efficient ways to pass on wealth:
| Pension IHT feature | Detail |
|---|---|
| IHT status | Usually outside your estate entirely |
| Death before 75 | Pension paid to nominees completely tax-free |
| Death after 75 | Nominees pay income tax at their marginal rate on withdrawals |
| No limit | No cap on the pension pot — all passes outside the estate |
| Nomination form | Must be completed and kept up to date |
Strategy: If you have other income in retirement, consider drawing down ISAs and savings first, leaving your pension as the last pot to be used. The pension passes to your family outside the estate.
Warning: From April 2027, the government plans to bring unused pension funds into the IHT net. This could significantly change the landscape — check the latest rules.
Related: Pension Nomination Form — Why It Matters
Strategy 7: Business Property Relief (BPR)
If you own a qualifying business or shares in one, BPR can reduce or eliminate IHT — but the rules changed significantly from 6 April 2026, and this section reflects the new regime.
From 6 April 2026, the 100% rate of BPR (combined with Agricultural Property Relief, APR — see Strategy 8) is capped at the first £2.5 million of combined qualifying agricultural and business property per person. Anything above that gets 50% relief instead of 100%. Any unused part of the £2.5 million allowance can be transferred to a surviving spouse or civil partner, so a couple can shelter up to £5 million combined.
| Asset | Relief rate |
|---|---|
| Business or interest in a business (within your £2.5m allowance) | 100% |
| Shares in an unlisted company (within your £2.5m allowance) | 100% |
| Qualifying business/agricultural property above the £2.5m allowance | 50% |
| Shares on AIM or any market not classed as a “recognised stock exchange” listing | 50% flat — does not use any of the £2.5m allowance |
| Land, buildings, or machinery used in your business | 50% |
| Shares in a listed company (controlling interest) | 50% |
You must have owned the asset for at least two years before death. The business must be trading (not mainly investment).
AIM shares: AIM-listed shares no longer qualify for 100% BPR. Since 6 April 2026 they get a flat 50% relief rate, regardless of the £2.5 million allowance. Before this change, some investors bought AIM shares specifically to get them free of IHT after a two-year holding period — that route is no longer available. AIM shares still carry higher investment risk than mainstream listed shares, on top of the reduced tax benefit.
Strategy 8: Agricultural Property Relief (APR)
Farmland and farm buildings can qualify for 100% or 50% relief from IHT — but like BPR, APR is now subject to the same shared £2.5 million allowance from 6 April 2026 (see Strategy 7). APR and BPR draw on the same combined £2.5 million 100%-relief allowance per person, not £2.5 million each.
| Condition | Relief |
|---|---|
| Owner-occupied for 2+ years, within your £2.5m combined APR/BPR allowance | 100% of agricultural value |
| Tenanted for 7+ years, within your £2.5m combined APR/BPR allowance | 100% of agricultural value |
| Qualifying agricultural property above the £2.5m combined allowance | 50% of agricultural value |
| Does not meet ownership/occupation conditions above | 50% of agricultural value |
APR covers the agricultural value only — any development value above that would still be taxed. BPR may cover the rest if the farm is a trading business, subject to the same combined allowance.
Strategy 9: Charitable Giving
| Charity strategy | IHT benefit |
|---|---|
| Leave any amount to charity | Exempt from IHT entirely |
| Leave 10%+ of net estate to charity | IHT rate drops from 40% to 36% on remaining estate |
| Donate assets during lifetime | Removes them from estate immediately |
Leaving 10% or more of your net estate to charity reduces the IHT rate on everything else from 40% to 36%. On larger estates, this can mean your beneficiaries receive more after tax than if you had not made the charitable gift.
Strategy 10: Life Insurance in Trust
A life insurance policy written in trust does not reduce IHT — but it provides the cash to pay the bill without forcing the sale of property or other assets.
| Feature | Detail |
|---|---|
| Written in trust | Payout goes directly to beneficiaries, bypasses estate |
| Not subject to IHT | Because it is in trust, not part of the estate |
| Pays quickly | Usually within weeks — avoids waiting for probate |
| Cost | Monthly premiums — shop around for best rates |
| Type | Whole-of-life policy (covers you no matter when you die) |
Related: Best Life Insurance
Strategy 11: Spend It
This is the simplest strategy and often overlooked. Money you spend during your lifetime is not in your estate when you die. Consider:
- Taking holidays and experiences you have been putting off
- Helping family members now rather than through a will
- Investing in your home (improvements add to quality of life, even if they also add to property value)
- Giving to causes you care about during your lifetime
The earlier you start planning, the more options you have. Someone with 20 years of annual gift exemptions can pass on £60,000 tax-free in gifts alone — before even considering the seven-year rule or trusts.
Strategy 12: Equity Release (With Caution)
Equity release reduces the value of your property in your estate. However, it comes with significant long-term costs:
| Factor | Detail |
|---|---|
| How it works | You borrow against your home — the loan plus rolled-up interest is repaid on death or care home entry |
| IHT effect | The loan reduces your estate value |
| Interest | Typically 5–7% compound — can double the debt in 10–15 years |
| Inheritance | Significantly reduces what you leave behind |
| Suitable? | Only if you understand the full cost and have taken independent advice |
This should be a last resort for IHT planning. The costs often outweigh the tax savings.
How Much Could You Save? — Worked Examples
Example 1: Married Couple, Estate £800,000
| Detail | Without planning | With planning |
|---|---|---|
| Estate value | £800,000 | £800,000 |
| Combined NRB | £650,000 | £650,000 |
| Combined RNRB | £350,000 (home to children) | £350,000 |
| Taxable estate | £0 (under £1m threshold) | £0 |
| IHT bill | £0 | £0 |
No action needed — the combined thresholds cover the entire estate.
Example 2: Single Person, Estate £750,000
| Detail | Without planning | With planning |
|---|---|---|
| Estate value | £750,000 | £750,000 |
| NRB | £325,000 | £325,000 |
| RNRB (home to children) | £175,000 | £175,000 |
| Annual gifts over 10 years | — | £30,000 |
| Normal expenditure gifts | — | £50,000 |
| Taxable estate | £250,000 | £170,000 |
| IHT bill | £100,000 | £68,000 |
Saving: £32,000 — through consistent use of exemptions alone.
Example 3: Wealthy Couple, Estate £2.5 million
This example also shows why the residence nil-rate band (RNRB) taper matters: it only fully disappears once an estate passes £2.7 million for a couple (see Strategy 3), so a £2.5 million estate still keeps some RNRB — more once lifetime gifts and pension planning bring the estate below the £2 million taper threshold.
Without planning: the full £2,500,000 stays in the estate at death. That’s £500,000 over the £2 million RNRB taper threshold, which reduces the couple’s combined £350,000 RNRB by £250,000 (£1 for every £2 over the threshold), leaving £100,000 of RNRB.
| Detail | Without planning |
|---|---|
| Estate value | £2,500,000 |
| Combined NRB | £650,000 |
| Combined RNRB (tapered — £500,000 over the £2m threshold) | £100,000 |
| Taxable estate | £1,750,000 |
| IHT rate | 40% |
| IHT bill | £700,000 |
With planning: £400,000 of lifetime gifts survive the 7-year rule and £300,000 sits in a pension outside the estate, so the estate at death is only £1,800,000 — below the £2 million taper threshold, so the full £350,000 combined RNRB is available.
| Detail | With planning |
|---|---|
| Estate value | £2,500,000 |
| Gifts using 7-year rule (removed from estate) | -£400,000 |
| Pension pot left outside estate | -£300,000 |
| Estate remaining at death | £1,800,000 |
| Combined NRB | £650,000 |
| Combined RNRB (untapered — estate now under £2m) | £350,000 |
| Estate before charitable legacy | £800,000 |
| Charitable legacy (10%+ of this amount reduces the rate to 36%) | £185,000 |
| Taxable estate | £615,000 |
| IHT rate | 36% |
| IHT bill | £221,400 |
Saving: £478,600 (£700,000 minus £221,400) — through a combination of strategies.
Common Mistakes
| Mistake | Consequence |
|---|---|
| Giving away your home but still living in it | Gift with reservation — stays in your estate |
| Not keeping records of gifts | HMRC may not accept exemptions |
| Assuming joint ownership avoids IHT | It does not — 50% of jointly owned assets count in each estate |
| Ignoring the pension nomination form | Pension could end up in your estate |
| Leaving it too late | The seven-year rule needs time to work |
| DIY trusts | Incorrectly set up trusts can create worse tax outcomes |
| Forgetting about pensions in the estate from 2027 | Planned changes may bring pensions into IHT |
When to Get Professional Advice
| Your situation | Action |
|---|---|
| Estate under £500,000 (single) or £1m (couple) | Likely no IHT issue — but check RNRB eligibility |
| Estate £500,000–£1 million | Review gifting strategy and pension nominations |
| Estate over £1 million | Professional advice strongly recommended |
| Business or agricultural assets | Specialist BPR/APR advice essential |
| Blended family or complex situation | Solicitor and financial adviser both needed |
Where to find help:
- Use a solicitor who is a member of STEP (Society of Trust and Estate Practitioners)
- Financial advisers specialising in estate planning — check at unbiased.co.uk
- HMRC IHT helpline: 0300 123 1072