More than 40,000 UK estates pay inheritance tax every year. Most of them could have paid less with earlier planning. Here's what the rules allow — in plain English.
Inheritance tax (IHT) is charged at 40% on the value of your estate above certain thresholds. For many families — particularly those who own property in areas where house prices have risen significantly — this has become a real concern. An estate worth £600,000 that doesn't plan effectively could leave a tax bill of £40,000 or more for the people left behind.
The good news is that the UK has a genuinely generous set of IHT exemptions and reliefs. Many estates that would otherwise face a large tax bill can reduce it substantially — or eliminate it entirely — through careful planning.
Before looking at planning strategies, it's worth understanding the two main tax-free allowances that every estate can use.
Every individual has a "nil-rate band" (NRB) of £325,000. This is the amount you can leave on death completely free of IHT. It has been frozen at this level since 2009 and will remain frozen until at least 2030.
Since 2017, there has been an additional allowance — the residence nil-rate band (RNRB) — worth £175,000 in 2026/27. This applies when a family home (or the proceeds from its sale) is passed to direct descendants: children, grandchildren, stepchildren and adopted children.
Combined, these give a single person a potential IHT-free estate of £500,000. The RNRB begins to taper away for estates valued above £2 million, reducing by £1 for every £2 above that threshold.
Estimate your estate's IHT bill instantly — including the residence nil-rate band
One of the most important — and underused — aspects of IHT planning for couples is that both the nil-rate band and the residence nil-rate band can be transferred between spouses and civil partners.
This means that when the second partner dies, their estate can claim up to double the allowances. If the first partner left everything to the surviving spouse (which is always IHT-exempt), the surviving spouse can use:
Total: up to £1,000,000 can be passed on completely free of IHT. For many couples, this is enough to cover their entire estate — particularly if they have a family home that was their main asset.
Giving money or assets away during your lifetime is one of the most powerful ways to reduce your eventual IHT bill. The key rules to understand:
Most gifts you make during your lifetime — to individuals, not trusts — are called Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls completely outside your estate and is IHT-free. If you die within seven years, the gift may be partially or fully taxable, using "taper relief":
| Years between gift and death | IHT rate on the gift | Taper relief applied |
|---|---|---|
| 0–3 years | 40% | 0% |
| 3–4 years | 32% | 20% |
| 4–5 years | 24% | 40% |
| 5–6 years | 16% | 60% |
| 6–7 years | 8% | 80% |
| 7+ years | 0% | 100% (fully exempt) |
There are several categories of gift that are exempt from IHT regardless of whether you survive seven years:
Per person, per tax year. Can be carried forward one year if unused — so up to £6,000 can be given in a single year.
You can give any number of people up to £250 each per year with no IHT implications. Cannot be combined with the £3,000 exemption for the same person.
Parents can give £5,000 per child on marriage. Grandparents can give £2,500. Anyone else can give £1,000.
Gifts made regularly out of your income (not capital) — such as paying a grandchild's school fees or a standing order to family — are fully exempt if they don't affect your own standard of living.
Historically, pensions have been one of the most effective IHT planning tools. Money held inside a pension sits outside your estate for IHT purposes — so you can leave your non-pension assets to fund your retirement while allowing your pension to pass to beneficiaries free of IHT on your death.
The government announced in the 2024 Autumn Budget that unused pension funds will be brought within the scope of IHT from April 2027. This is a significant change from the current rules. It means that from April 2027, any pension funds left unspent on death will form part of your taxable estate.
If you are planning your estate, this is an important development to factor in — particularly if you were relying on pension funds as a primary IHT planning tool. The rules are still being consulted on, so the precise mechanics may change before implementation. Speak to a financial adviser about how this affects your plans.
Gifts to UK registered charities are completely exempt from IHT — both during your lifetime and on death. There is no limit on the amount you can leave to charity IHT-free.
There's a particularly interesting rule that many people don't know about. If you leave at least 10% of your "net estate" (the amount above the nil-rate band) to charity, the IHT rate on the rest of your taxable estate reduces from 40% to 36%. This can make charitable giving effectively very cheap — or even self-funding.
Two very valuable IHT reliefs exist for business owners and farmers:
Assets that qualify for Business Property Relief can be passed on with 100% IHT relief — meaning no IHT to pay at all. Qualifying assets include shares in unlisted companies (including AIM shares held for at least 2 years), business property, and interests in business partnerships.
This is why many wealthy individuals invest in AIM-listed companies: unlike shares on the main stock exchange, AIM shares held for two years can qualify for 100% BPR. However, AIM investments carry significant investment risk and are not suitable for everyone — the tax tail should never wag the investment dog.
Farmland and farm buildings used for agricultural purposes can also qualify for 100% IHT relief under Agricultural Property Relief. The rules are complex and have been subject to government consultation — if you farm land, specialist advice is essential.
Trusts are legal structures that allow you to pass assets to beneficiaries while retaining some control over how and when they receive them. They can be useful for IHT planning, but the rules are complex and the tax treatment has changed significantly over the years.
A discretionary trust allows trustees to decide how assets are distributed among a class of beneficiaries. For IHT purposes, assets placed in a discretionary trust are generally subject to an immediate 20% IHT charge (above the nil-rate band), plus periodic "ten-year charges" and exit charges when assets leave the trust. They are more complex than straightforward gifting and usually require ongoing professional management.
Trusts are most useful when you want to benefit people who aren't yet able to manage money themselves (such as young children), when you want to protect assets from divorce or creditors, or when you want to control who ultimately benefits from your estate. For pure IHT savings, straightforward gifting is often simpler and cheaper.
IHT planning works best when started early. The seven-year rule means that gifts made today won't be fully effective for seven years — so the sooner you start, the better. Here's a practical checklist:
Use our free calculator to see how much inheritance tax your estate might face