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.
For the wider cluster covering thresholds, gifting rules and calculators, use the main Inheritance Tax hub.
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 |