Inheritance Tax Planning - Strategies to Protect Your Wealth

In recent years, inheritance tax (IHT) receipts have been rising steadily, hitting a record high of £8.2 billion in 2024-25. The Nil-rate band and residence nil-rate band have been frozen until April 2031, as was further announced in the Budget 2025, while inflation in property and asset values pushes more estates over the tax-free thresholds. The Office for Budget Responsibility (OBR) predicts that IHT receipts will continue to surge, reaching £9.1 billion in 2025–26 and £14.3 billion by 2029–30, highlighting the growing impact on households. 

Smart planning can make a significant difference for estates that might face a substantial inheritance tax (IHT) bill. By putting strategies in place early, families can help reduce the impact on beneficiaries and the next generation, ensuring they retain more of their inheritance rather than paying unnecessary tax. Many assume IHT only affects the very wealthy, but that is no longer true. Rising property values, growing investment portfolios, frozen thresholds and the inclusion of pensions in estates from April 2027 mean more households are being drawn into the IHT net. 

What is inheritance tax?

Inheritance is a tax on your wealth that is paid on your death. It can also apply to some gifts that are made during your lifetime.

There are several ways to reduce your inheritance tax liability. Options include increasing your spending, making personal gifts during your lifetime, trusts planning, and making full use of available allowances. However, research shows that over 30% of people only begin considering IHT planning after the age of 55, and many families postpone these conversations until it’s too late to make a meaningful difference. This hesitation often stems from the complexity of the rules and the wide range of strategies available. However complex your situation and estate, it is beneficial to engage with a financial adviser to explore and narrow down the options to ensure you are taking the right steps for you and your family.  

What is estate planning?

Estate planning is the process of arranging what happens to your money, property, and possessions after you pass away or if you become unable to manage them yourself. It ensures that your wishes are followed, your loved ones are provided for, and your affairs are handled as smoothly as possible.

At its core, estate planning involves creating a will, which outlines who should inherit your assets. But it can also include setting up trusts, appointing guardians for children, choosing someone to make financial or medical decisions on your behalf if you're unable to, and making plans to reduce taxes or legal complications for your heirs.

Good estate planning helps protect your legacy and gives you peace of mind, knowing everything is in place for the future. Whether your estate is large or small, having a clear plan can save your family time, stress, and unnecessary costs during a difficult time. 

How to reduce an inheritance tax bill

There are several legitimate ways to reduce an IHT bill, often through careful planning and by making full use of available reliefs and exemptions. 

Spending more during your lifetime is one of the simplest ways to reduce the size of your estate and, in turn, your inheritance tax bill. Of course, this doesn’t mean reckless splurging, more enjoying the wealth you have worked hard for. Explore with your financial adviser what level of spending is sustainable for you and your family.

Outright Gifts during your lifetime can significantly reduce the value of your estate, especially if you survive seven years from the date the gift is made, this is know as the 7 year rule inheritance tax. Using annual gift exemptions, wedding gift allowances, and making gifts from surplus income can all be effective strategies. You can learn more in our full guide to gifting.

Gifting a Regular Income is an often-overlooked strategy. If you have more income than you need for your normal living expenses, you can make regular gifts without them being subject to IHT, provided they come from income, not capital, and don’t affect your standard of living. This can be a powerful way to pass on wealth gradually while reducing your taxable estate. It’s important to know how to structure the options for your estate, and how to ensure these gifts meet HMRC’s criteria and are properly documented.

Life Insurance can help your beneficiaries cover inheritance tax bills. Policies written in trust ensure the payout doesn’t increase the estate’s value. This approach is increasingly popular, especially with pensions coming into scope for IHT from April 2027, which could add thousands to future liabilities.

Trusts can be used to pass on assets while maintaining some control over them. They can help keep certain assets out of your estate for IHT purposes and can be tailored to specific family circumstances. Not all trusts are the same, and their tax treatment can vary. Discover more about how trusts work here.

Equity release can reduce the taxable value of your estate while providing funds for retirement or gifting. It’s not suitable for everyone, as it reduces what you leave behind and can affect entitlement to benefits, but for some, it’s a practical way to unlock wealth tied up in property.

Charitable giving can reduce your inheritance tax bill while supporting causes that are important to you. Gifts to registered charities are exempt from IHT, and if you leave more than 10% of your net estate to charity, the rate of IHT on the remainder may be reduced from 40% to 36%.

Pensions currently often fall outside of your estate for inheritance tax purposes. This is why pensions have played an excellent role in estate planning. However, from April 2027 this is changing, which may dramatically affect your estate planning strategy.  

Business Relief (BPR) and Agricultural Relief (APR) were designed to reduce inheritance tax on qualifying business and farming assets, helping families avoid selling businesses or farms to pay the tax bill. Under current rules, eligible assets (such as shares in unquoted companies, AIM-listed shares, farmland, and farm buildings), can attract up to 100% relief. However, from April 2026, a combined £1 million cap will apply across both reliefs for 100% relief, with any excess only qualifying for 50% relief. This change makes planning essential, especially for larger estates. These rules are complex, and this can pose additional risks to consider such as ownership structure and timing.

Please note that business relief is a high‑risk investment and you are unlikely to be protected if something goes wrong. Don’t invest unless you’re prepared to lose all the money you invest. 

Our financial advisers can help assess which of these strategies are appropriate based on your individual circumstances.

If you would like to know more about how we can help you with IHT planning, you can speak to an adviser for more information. 

If you would like to know more about how we can help you with IHT planning, you can speak to an adviser for more information.

Arrange your free initial consultation

What is the inheritance tax threshold? 

Everyone has a £325,000 inheritance tax nil-rate band (NRB). If you are married or in a civil partnership, you and your spouse have a combined nil-rate band of £650,000. 

Current Nil Rate Band

The standard nil-rate band is set at £325,000 and is fixed at this level until April 2031. This threshold applies to the total value of your estate that can be passed on tax free. Any value above this threshold is typically subject to inheritance tax at 40%, unless reliefs or exemptions apply. 

Residence Nil Rate Band

The residence nil-rate band (RNRB) was introduced to allow individuals to pass on the family home to direct descendants more tax efficiently. For the 2025/26 tax year, this additional allowance remains at £175,000.

To qualify for the RNRB, the property must have been your main residence at some point and must be passed to a direct lineal descendant such as a child or grandchild. The maximum RNRB is £175,000 each - capped at the lower of this limit and the value of the property.

If the estate is valued over £2 million, the RNRB tapers off by £1 for every £2 over the threshold. This means the allowance is lost entirely once the estate reaches £2.35 million for an individual, or £2.7 million for a couple using both allowances. 

How much inheritance is tax free?

How to calculate inheritance tax and estate value

Calculating IHT begins with working out the total value of your estate, which includes all your assets such as property, savings, investments, possessions, and any gifts made in the last seven years. From this, any debts or liabilities are deducted to arrive at the net estate value. Any amount over the NRB or RNRB is usually taxed at 40%, unless specific exemptions or reliefs apply.

However, calculating IHT can be complex due to several factors. These include lifetime gifting rules, available exemptions (such as those for spouses or charities), the use of trusts, and regularly changing tax legislation. Without careful planning, it’s easy to overlook valuable reliefs or trigger unnecessary tax charges. 

To help you visualise these numbers, we've put together an inheritance tax calculator:

The results from the calculator are only a guide and are not guaranteed. The results should not be relied upon as a recommendation or deemed as advice.

Who has to pay inheritance tax? 

The responsibility for paying inheritance tax usually falls to the executor or administrator of the estate. However, the liability can vary depending on who receives what and under what circumstances.

Spouses and civil partners are usually exempt from inheritance tax when inheriting from one another. Transfers between spouses are not subject to IHT, and any unused NRB or RNRB can be transferred to the surviving partner assuming they have been UK long term residents.

Children and grandchildren may have to pay inheritance tax depending on the value of the estate and how the assets are passed on. If the estate exceeds available allowances and reliefs, IHT at 40% may apply to the portion above those thresholds.

Other beneficiaries such as siblings, friends or more distant relatives may also be liable to pay IHT if they receive assets from an estate that exceeds the tax-free thresholds. The amount of tax due will depend on the total estate value and whether any exemptions apply. 

What are the new rules for Inheritance tax on Pensions? 

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a person’s estate for Inheritance Tax (IHT) purposes. This is a major change from the current position.

This shift changes long-standing financial planning strategies. Leaving pensions untouched for beneficiaries was previously considered tax-efficient, but under the new rules, that approach could result in significant liabilities. In addition to IHT, beneficiaries may also face income tax when drawing funds from inherited pensions, particularly if the deceased was over 75 at the time of death. This combination of taxes creates additional complexity and could substantially reduce the overall value passed on. Understanding these implications is essential to ensure that your estate planning remains effective and that the next generation is not burdened with unexpected “double taxation” trap. 

Avoiding inheritance tax on your estate through gifting

Avoiding inheritance tax on your estate through gifting involves understanding the rules. Knowing these key figures can help you quickly assess whether your gifts may be exempt from IHT and potentially prevent an unnecessary tax bill later on.

	Annual gifting exemption You can give away a total of £3,000 worth of gifts each tax year, known as your ‘annual exemption’. It can be gifted to one person or split between several people. If you didn’t use the exemption in the previous tax year, you can carry it forward for one year and combine it with the exemption for the current tax year and gift up to £6,000.
	Small gifts You can give as many small gifts of up to £250 per person as you like each tax year – just make sure you haven’t used another allowance (like the annual gifting allowance mentioned above) for the same person.
	Wedding gifts You can give a tax-free gift to someone who’s getting married or entering a civil partnership. The limits are £5,000 to a child £2,500 to a grandchild/ great grandchild £1,000 to anyone else. If you’re gifting to the same person, you can combine this wedding gift allowance with your annual exemption, but not with the small gift allowance. For example, you could give your child £5,000 as a wedding gift and an additional £3,000 using your annual exemption, all in the same tax year.
	Gifts to charities and political parties Gifts to registered charities and political parties are exempt from inheritance tax.
	Gifts from income You can make regular gifts from your surplus income as long as they don't affect your normal standard of living. Any gifts must form part of your normal expenditure, meaning that there must be an observable, regular pattern, should HMRC decide to audit any records. Examples of a gift out of regular income might include covering your child’s rent, or paying into a savings account for a child under 18. You can combine this exemption with other allowances (like your annual exemption) when giving to the same person - just not with the small gift allowance. For instance, you could pay your son’s monthly rent from surplus income while also giving him a one-off £3,000 gift using your annual exemption.
	Lifetime gifts Potentially Exempt Transfers (PETs) and gifts into Trust: Both are lifetime gifts for inheritance tax purposes and will be affected by the seven-year rule.

The seven-year rule in inheritance tax refers to how gifts are treated for tax purposes after your death, should you die before or after seven years following the gift. If you die within seven years of making the gift, it may be subject to IHT, depending on the amount given and who received it. In some cases, taper relief may reduce the amount of tax payable if the gift was made more than three but less than seven years before death. If you survive 7 years from the date the gift was given, in many cases the gift will be free of IHT, regardless of the value.

Other things to note about gifting:

• Gifts between spouses are free of inheritance tax.
• Gifts to help with family maintenance: You can make gifts to help relatives with their living costs if they are financially dependent such as a child under age 18 or in full time education, an elderly family member who needs financial assistance or even a former spouse.

If you would like to know more about how we can help you with IHT planning speak to an adviser for more information.

Arrange your free initial consultation

The Financial Conduct Authority does not regulate Estate Planning, Will Writing, Tax Advice or Trusts. 

The information contained on this page is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

*This is a lifetime mortgage (home reversion scheme). To understand the features and risks, ask for a personalised illustration.

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