Inheritance Tax (IHT) can significantly reduce the value of your estate. Between April and August 2025, HM Revenue & Customs collected £3.7 billion in IHT — £0.2 billion more than during the same period last year.¹
Although the rules can appear complex, there are legitimate and effective ways to reduce the amount of tax your loved ones may have to pay after your death.
How Inheritance Tax Works
Under current tax rules, IHT is charged at 40% on the portion of your estate that exceeds £325,000, known as the nil-rate band. This threshold is frozen until April 2030.
An additional £175,000 residence nil-rate band may apply if you pass your main home to direct descendants. Married couples and registered civil partners can combine their allowances, allowing up to £1 million of assets to be transferred tax-free.
If your estate falls below these combined thresholds, no IHT is payable. For larger estates, however, careful planning can significantly reduce the tax due.
1. Write a Will
A valid Will is one of the most important tools in IHT planning. It ensures your assets are distributed according to your wishes and helps avoid unnecessary tax liabilities.
Without a Will, your estate is distributed under the rules of intestacy (excluding assets held as joint tenants, which automatically pass to the surviving owner). This may not reflect your intentions or make full use of available tax allowances.
2. Leave a Gift to Charity
Charitable giving can support causes close to your heart while reducing the IHT payable on your estate. Gifts to registered charities are exempt from IHT.
If you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate can be reduced from 40% to 36%.
When planning a charitable legacy, it is often better to leave a percentage of your estate rather than a fixed sum. This helps ensure the gift remains proportionate if your estate’s value changes.
3. Take Out a Life Insurance Policy
A whole-of-life insurance policy written into an appropriate trust can provide a lump sum to help beneficiaries pay an IHT bill.
Placing the policy in trust keeps the payout outside your estate, meaning it is not subject to IHT and can usually be paid quickly without waiting for probate.
If your policy is not currently held in trust, insurers typically provide a simple form to arrange this. However, if you are seriously ill when the policy is transferred and die within seven years, its value may still be included in your estate.
When placing a policy into trust, the amount treated as a gift is usually the higher of the policy’s surrender value or the total premiums paid. If you are in poor health, a value closer to the expected death benefit may be used instead. Ongoing premiums are also treated as gifts unless they qualify for an exemption.
4. Make Gifts During Your Lifetime
Making gifts during your lifetime can reduce the value of your estate.
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You can gift up to £3,000 per tax year, with the option to carry forward one unused year.
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Small gifts of up to £250 per recipient per year are exempt, provided no larger gift is made to the same person.
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Larger gifts may fall outside your estate if you survive for seven years after making them.
You can also make regular gifts from surplus income, as long as they do not affect your standard of living. For example, monthly payments to children or grandchildren may qualify if they are funded from income rather than capital.
5. Avoid Accessing Your Pension Too Soon
Pension funds are currently exempt from IHT, making them one of the most tax-efficient assets to pass on to beneficiaries.
However, the government intends to include pensions within IHT calculations from April 2027, which may change how retirement wealth is managed.
Until then, leaving pension funds untouched for as long as possible may be beneficial. Reviewing your retirement income strategy in light of upcoming changes can help ensure you access your assets in the most tax-efficient way.
6. Get Married or Enter a Registered Civil Partnership
Marriage or a registered civil partnership can offer significant IHT advantages.
Assets passed to a spouse or civil partner are exempt from IHT, and any unused allowances can be transferred to the surviving partner. This effectively doubles the available threshold, allowing up to £1 million to pass tax-free when both the nil-rate band and residence nil-rate band are fully utilised.
For unmarried couples, the rules are less generous. Transfers between partners are not automatically exempt, and allowances cannot be combined. For couples with substantial shared wealth, formalising the relationship can therefore offer meaningful tax benefits.
Could Your Estate Face a Higher Tax Bill Than Necessary?
Effective Inheritance Tax planning can help you safeguard more of your wealth for your family. Early action may allow you to maximise exemptions, gifts, and available tax allowances.
To discuss your circumstances and explore your options, contact us to arrange a review.
