Tax Guide: How to Reduce Inheritance Tax Legally — Allowances, Trusts and Planning Strategies for 2026/27

Inheritance Tax is charged at 40% on the value of an estate above the nil rate band (NRB). The NRB has been frozen at £325,000 since 6 April 2009, and the HMRC thresholds table now shows it staying there until 5 April 2031 — more than two decades without an increase.

There is a second allowance on top: the Residence Nil Rate Band (RNRB) of £175,000, available when a qualifying home is passed to direct descendants (children, grandchildren, stepchildren). That brings the combined threshold to £500,000 per person. The RNRB has been £175,000 since April 2020 and is currently set through to 5 April 2030.

For married couples and civil partners, any unused NRB and RNRB can be transferred to the surviving partner's estate, so a couple can pass on up to £1,000,000 before any IHT is due.

The RNRB tapers for estates worth more than £2 million — it is reduced by £1 for every £2 above that limit, disappearing entirely at £2.35 million for an individual (or £2.7 million for a couple using both RNRBs). For high-value estates, this tapering turns into a 60% effective marginal rate on the band between £2 million and £2.35 million, which is why planning matters most at exactly the point people assume they are safe.

Our IHT rates and thresholds guide covers the full rate structure. A reduced IHT rate of 36% applies if you leave at least 10% of your net estate to charity in your will. For the wider picture, start with our guide to Wills, Probate and Protecting Your Family's Future.

The simplest way to shrink your estate is to give assets away while you are alive. Several exemptions allow tax-free gifting, and they stack on top of each other:

• Spouse or civil partner gifts: Unlimited tax-free transfers between spouses or civil partners, as long as both live in the UK permanently.
• Annual exemption: Give away up to £3,000 per tax year free of IHT. If unused, the previous year's allowance can be carried forward for one year, allowing a one-off gift of £6,000.
• Small gifts exemption: Up to £250 to any number of individuals per tax year — but not to someone who has already received your annual exemption.
• Wedding or civil partnership gifts: Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. You can combine a wedding gift with your annual exemption in the same tax year.
• Gifts to charities, political parties and national institutions: Completely exempt, with no limit.
• Birthday and Christmas gifts paid from your regular income are also exempt.

The most powerful exemption is normal expenditure out of income. If you can show that regular gifts come from income rather than capital, and that they do not reduce your standard of living, they are immediately exempt with no upper limit. This covers everything from paying a child's rent to funding a grandchild's savings account — but you must keep records: a schedule showing income, expenditure and the surplus used for gifting.

For larger gifts that exceed these exemptions, the seven-year rule applies: survive seven years after the gift and it falls completely outside your estate. Die earlier and taper relief applies — but only once total gifts in the seven years before death exceed £325,000. The scale runs from 40% on gifts in the final three years, down through 32%, 24% and 16%, to 8% in years six to seven.

Anything above these allowances is a potentially exempt transfer: it sits outside your estate only once you have survived seven years. That is why the exemptions matter most for anyone starting to plan in their 50s or 60s — they let wealth leave your estate today rather than waiting on the seven-year clock.

Pensions remain one of the most tax-efficient IHT planning tools available. Defined contribution pots — SIPPs, workplace pensions and personal pensions — currently sit outside your estate for IHT purposes. That means a pension pot can pass to your beneficiaries free of IHT; see our guide to pension death benefits for the full rules.

That treatment ends on 6 April 2027, when unused pension funds and most death benefits are brought into the scope of Inheritance Tax. It is the single biggest shift in UK estate planning for a generation, and anyone with a large pot should revisit their drawdown strategy before the rules change.

Until then the logic is straightforward: if you have other income sources (ISAs, savings, rental income), spend those first and leave the pension untouched. Every pound left in a pension is currently a pound outside IHT.

If you die before age 75, your pension beneficiaries can draw the funds free of income tax. If you die after 75, beneficiaries pay income tax at their marginal rate on withdrawals — but under current rules there is still no IHT charge on the pension itself. The annual allowance of £60,000 (or 100% of earnings if lower) limits how much you can contribute each year, with carry forward from the previous three tax years potentially allowing up to £180,000 in a single year if you have unused allowance.

Two changes collide for estates that hold both a valuable home and a large pension. The residence nil-rate band tapers away once the value of the estate passes £2 million — so a pension pot that previously sat outside the estate could, from April 2027, also drag a couple past the taper point and erode their home allowance. If your estate sits near £2 million, the pension change is not a single tax line: it is a second hit on your main home.

For larger estates, more sophisticated tools are available.

Trusts remove assets from your estate while letting you retain some control over how they are distributed. Discretionary trusts, bare trusts and interest-in-possession trusts each carry different IHT implications. Setting one up during your lifetime is a chargeable lifetime transfer — if the value exceeds the NRB, an immediate 20% IHT charge applies, with a further charge possible at death within seven years. Professional advice is essential.

Business Relief allows qualifying business assets to be passed on with reduced or zero IHT:

• 100% relief: unlisted shares, unincorporated businesses, an interest in a partnership
• 50% relief: shares controlling more than 50% of a listed company, and land, buildings or machinery used in a qualifying business

Assets must normally have been owned for at least two years (see HMRC Business Relief rules). The rules tightened on 6 April 2026: AIM shares now attract 50% relief rather than 100%, and the 100% rate of Business Relief and Agricultural Relief is capped at a combined £1 million, with 50% relief applying above that.

Agricultural Relief works on the same 100%/50% structure for farming land and property, with the two-year ownership requirement and the same £1 million cap now in force.

Life insurance written in trust is a different, widely used strategy. A whole-of-life policy written into trust pays out a tax-free lump sum to cover the IHT bill, so beneficiaries do not have to sell the family home or investments to settle the tax.

IHT planning is full of traps. These are the most expensive mistakes:

• Assuming your estate is too small: The £325,000 nil-rate band has not moved since 2009, while property and investment values have. Many families with an ordinary home, savings and a pension are now inside the IHT net without realising it.
• Not making a will: Dying intestate means your estate is distributed according to default legal rules, which may not match your wishes or use IHT-efficient structures.
• Gifting the family home but still living in it: This is a 'gift with reservation of benefit' and stays in your estate. You must genuinely transfer full ownership — or pay market rent — for it to work.
• Not keeping records of gifts: Normal expenditure out of income is only exempt if you can prove the pattern. Keep a record of every gift: amount, date, recipient, and your income and expenditure at the time.
• Leaving it too late: The seven-year rule needs time. Starting at 50 gives you decades of effective gifting; starting at 80 may be too late for larger transfers.

Steps you can take this tax year:

1. Value your estate — property, savings, investments, pensions, life insurance payouts and possessions.
2. Write or update your will so it uses both the NRB and RNRB efficiently.
3. Use your annual exemptions — see our tax year-end checklist for the full list of actions.
4. Set up regular gifts from surplus income and document the pattern.
5. Review your pension drawdown strategy — draw from non-pension sources first while pensions remain outside IHT.
6. Take professional advice for estates above £500,000. An IHT-specialist solicitor or financial planner typically pays for themselves many times over.

For the wider picture on UK tax, explore our tax hub.

This article is for informational purposes only and does not constitute regulated financial advice. Inheritance Tax planning can be complex — consult a qualified financial adviser or solicitor before making decisions.