Tax Saving

Inheritance Tax Planning UK 2026: How to Reduce Your IHT Bill Legally

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Inheritance Tax (IHT) is charged at 40% on the value of an estate above the tax-free threshold. With property prices having risen dramatically, many families who don't consider themselves wealthy find themselves with IHT liabilities. The good news: there are multiple entirely legal ways to reduce or eliminate your IHT bill — but they require planning, not last-minute action.

IHT Thresholds for 2026

The standard nil-rate band (NRB) is £325,000 — you pay no IHT on the first £325,000 of an estate. The residence nil-rate band (RNRB) adds £175,000 when you leave your home to direct descendants (children, grandchildren), giving a combined threshold of £500,000 per person. Married couples and civil partners can combine allowances: up to £1,000,000 can pass to children before IHT applies. Above these thresholds: 40% on the excess (or 36% if you leave at least 10% to charity).

Gifting Money to Reduce IHT

The most straightforward IHT planning tool: give money away. Gifts survive IHT if you live 7 years after making them (potentially exempt transfers). Annual exemption: £3,000/year per person — always IHT-free. Small gift exemption: £250/person/year to as many people as you like. Wedding/civil partnership gifts: up to £5,000 to each child, £2,500 to grandchildren, £1,000 to anyone else. Regular gifts from surplus income (not capital) are immediately exempt.
  • •£3,000 annual exemption — carry forward one year if unused (£6,000)
  • •Gifts to charity: fully exempt, and reduce effective IHT rate to 36%
  • •Business relief: up to 100% relief on qualifying business assets
  • •Agricultural property relief: up to 100% on farmland and farming businesses

Pensions and IHT

Until April 2027 (when rules change), pensions generally fall outside your estate for IHT purposes. This makes pension pots a tax-efficient way to pass wealth to heirs. From April 2027, unused pension funds will become part of the estate for IHT purposes — a major change that may require planning for larger estates. Speak to a financial adviser about the interaction between pension drawdown, IHT, and your overall estate plan.
Does IHT apply to gifts between spouses?+

No — gifts between married couples and civil partners are completely exempt from IHT, regardless of amount, as long as both are UK-domiciled.

What if I give away my home?+

If you give away your home but continue to live in it, HMRC may still include it in your estate under 'gift with reservation of benefit' rules. Proper planning with a solicitor is essential before attempting this.

Life Insurance in an IHT Trust

A whole-of-life insurance policy written in trust provides funds to pay an IHT bill without the money itself becoming part of the estate. Heirs can use the payout immediately (no waiting for probate) to cover the IHT liability. The policy should be written in trust from day one — otherwise the payout itself becomes subject to IHT. This is a popular strategy for estates with property wealth but limited liquid assets. Always get specialist legal and financial advice for IHT planning.
#inheritance tax#IHT#estate planning#tax planning UK#wills

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