Frozen thresholds and rising asset values are pulling more ordinary estates into inheritance tax every year, and from April 2027 most unused pensions join the estate too. This guide explains how IHT works and the legitimate ways to reduce the bill.
How does inheritance tax planning work?
Inheritance tax is charged at 40% on the value of an estate above £325,000, plus a £175,000 residence nil-rate band when a home passes to direct descendants. It can be reduced legitimately through gifting, trusts, business relief and life cover written in trust.
Inheritance tax is charged at 40% on the part of your estate above your available allowances when you die. Your estate is broadly everything you own: property, savings, investments, and from 6 April 2027, most unused pension funds too.
Anything left to a spouse or civil partner is exempt, and they inherit your unused allowances. Leave at least 10% of your net estate to charity and the rate on the rest falls from 40% to 36%. Both nil-rate bands are frozen until at least April 2030 [VERIFY: freeze end date, GOV.UK], which is why more estates are being caught each year without any change in the law.
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The nil-rate bands: £325,000 plus the £175,000 residence allowance
Everyone has a nil-rate band of £325,000. If you leave your main home to direct descendants, children or grandchildren, you add a residence nil-rate band of up to £175,000, taking the individual threshold to £500,000.
Both bands transfer between spouses and civil partners, so a surviving partner can pass on up to £1,000,000 free of IHT where the home goes to the children. Two caveats: the residence band tapers away for estates above £2 million, and neither band is rising with inflation while frozen.
Gifting and the 7-year rule
Gifts you make during your lifetime usually fall out of your estate if you survive them by seven years. Die within seven years and the gift may still be taxed, but at a tapered rate once three years have passed. The taper only applies to gifts above the nil-rate band.
Years between gift and death | IHT rate on the gift |
Less than 3 years | 40% |
3 to 4 years | 32% |
4 to 5 years | 24% |
5 to 6 years | 16% |
6 to 7 years | 8% |
7 or more years | 0% |
Smaller reliefs work immediately: an annual gifting exemption of £3,000, small gifts of £250 per person, wedding gifts, and the often overlooked exemption for regular gifts out of surplus income, which has no upper limit if it genuinely comes from income and leaves your standard of living intact.
Using trusts for inheritance tax planning
Trusts let you give assets away, moving them outside your estate over time, while keeping control over who benefits and when. They are commonly used for gifts to young children or grandchildren, and structures such as discounted gift trusts can allow you to retain a fixed income from the amount given away.
Trusts carry their own tax regime, including potential entry, ten-year and exit charges, and the rules interact with the reliefs below. They are powerful but technical, and need professional advice, usually a financial adviser and a solicitor working together.
Business Relief and AIM investments
Business Relief can remove qualifying business assets from the IHT calculation after two years of ownership. The rules changed significantly from 6 April 2026: 100% relief is now capped at £2.5 million of combined business and agricultural property per person, transferable between spouses, so a couple can cover up to £5 million. Value above the cap gets 50% relief, an effective 20% tax rate.
AIM-listed shares now qualify for 50% relief only, regardless of the cap. Business Relief investments, particularly AIM portfolios, are higher risk and can fall sharply in value; the tax relief should never be the only reason to hold them. This is an area where regulated advice is essential.
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Life insurance written in trust to cover the bill
Sometimes the most practical answer is not to reduce the bill but to fund it. A whole of life policy written in trust pays out outside your estate, giving your executors cash to settle the IHT without selling the family home or unwinding investments under time pressure.
Written in trust is the crucial part: a policy paid into your estate would itself be taxed. Our whole of life insurance service covers how this works in practice.
Recent and expected changes to inheritance tax
Two changes matter most right now. First, from 6 April 2026, the Business and Agricultural Relief cap described above took effect under the Finance Act 2026, with the 100% allowance set at £2.5 million per person after the government raised it from the originally proposed £1 million.
Second, from 6 April 2027, most unused pension funds and death benefits will be included in the estate for IHT. Pensions have historically sat outside the estate, so this reshapes retirement and estate planning together: the order in which you draw pensions, ISAs and other assets may need rethinking. Spouse and charity beneficiaries remain exempt, as do death in service benefits.
When to get inheritance tax advice
If your estate, including your home and, from 2027, your pensions, is likely to exceed £500,000 as an individual or £1 million as a couple, planning will probably save your family money. The earlier you start, the more options work: the seven-year clock, gifts from income and trust planning all reward time.
IHT planning sits where financial advice and legal work meet. An adviser structures the assets, gifts and cover; a solicitor handles wills and trust deeds. Both are needed for a robust plan.
Frequently Asked Questions
How much can you inherit tax-free in the UK?
It depends on the estate’s allowances, not the recipient. An individual estate has a £325,000 nil-rate band, plus up to £175,000 residence nil-rate band where a home passes to direct descendants. Couples can combine allowances, so up to £1,000,000 can pass tax free. Anything left to a spouse or charity is exempt entirely.
How does the 7-year gifting rule work?
Can a trust avoid inheritance tax?
How much is inheritance tax in 2026?
Start while every option is still open
Inheritance tax is one of the few taxes that careful, entirely legitimate planning can substantially reduce. The common thread across every method is time: the sooner the plan starts, the more of your estate reaches your family.
If you would like to understand your likely IHT position, including the effect of the 2026 and 2027 changes, our inheritance tax planning service is the place to start, or get in touch directly.
This article is for information only and does not constitute personal financial or tax advice. Tax treatment depends on individual circumstances and may change; inheritance tax rules change frequently and figures are stated for the current position at the date of writing. Business Relief and AIM investments are higher risk and can fall in value. Ark Wealth Management is an Appointed Representative of Quilter Financial Services Ltd and is authorised and regulated by the Financial Conduct Authority.
Sources Used
- GOV.UK, How Inheritance Tax works: thresholds, rules and allowances
- GOV.UK, Inheritance tax reliefs threshold to rise to £2.5m (Dec 2025 announcement)
- House of Commons Library, Changes to agricultural and business property reliefs (Finance Act 2026)
- HMRC draft legislation and technical consultation: Inheritance Tax on pensions from 6 April 2027
- Finance Act 2026, section 65 and schedule 12 (Business and Agricultural Relief cap)
- [VERIFY] Nil-rate band freeze end date (2030 vs 2031) against current GOV.UK guidance before publishing.
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