The Complete UK Guide to Inheritance Tax Planning

Inheritance tax has a reputation as a problem only for the very wealthy. In reality, frozen thresholds and rising house prices mean an ordinary home plus modest savings and a pension can quietly add up to a taxable estate. The good news is that with a little planning, most of it entirely straightforward, families can legitimately pass on a great deal more.

This guide explains how inheritance tax works in 2026, the allowances everyone should be using, and the tools, gifting, trusts, pensions, business relief and life cover, that reduce a future bill. It is information, not personal advice, but it will help you understand where you stand before you speak to anyone.

How inheritance tax works

Inheritance tax (IHT) is charged at 40% on the value of an estate above the tax-free threshold. Your estate is the total of everything you own, property, savings, investments, possessions and, from April 2027, most unused pension funds, less any debts and liabilities. It is paid before the remainder passes to your beneficiaries.

Every individual has a nil-rate band of £325,000, and an additional residence nil-rate band of up to £175,000 when a main home is passed to direct descendants such as children or grandchildren. Both bands are frozen until April 2030, which, because house prices and investments keep rising, quietly pulls more families into paying IHT each year, a phenomenon known as fiscal drag. Allowances are transferable between spouses and civil partners, so a married couple can often pass on up to £1 million between them. For a plain-English recap of the numbers, see our answer on the inheritance tax threshold.

The allowances at a glance

Make full use of your allowances

The foundation of good IHT planning is using every allowance available, the nil-rate band, the residence nil-rate band, and the spousal exemption. Getting the ownership of assets and the wording of your wills right, so that none of these bands is accidentally wasted, is often the single biggest lever, and it costs nothing but careful arranging.

The residence nil-rate band has conditions worth knowing. It applies only to a main residence left to direct descendants, and it tapers away for larger estates, reducing by £1 for every £2 by which the estate exceeds £2 million. There are also provisions that preserve it if you have downsized. The spousal exemption is the other great pillar: anything you leave to a spouse or civil partner passes free of IHT, whatever its value. The catch is that leaving everything to each other can sometimes waste allowances or store up a larger bill on the second death, which is why both partners’ wills should be looked at together. Unmarried couples, importantly, do not get this exemption at all.

Gifting during your lifetime

Giving assets away while you are alive is one of the simplest and most effective ways to reduce a future bill. Several gifts are exempt straight away: £3,000 a year under the annual exemption (with one unused year carried forward), small gifts of up to £250 to any number of people, and wedding gifts within set limits.

More powerful still is the exemption for regular gifts out of surplus income. If you make gifts from genuine excess income, not from capital, on a regular basis, and they do not reduce your own standard of living, they can be immediately free of IHT with no upper limit. Good record-keeping is essential. Larger one-off gifts are treated as “potentially exempt transfers”: they fall out of your estate entirely if you survive seven years, with a tapering reduction if you die between three and seven years after making them. Our dedicated guide on how to reduce inheritance tax legally works through each of these in turn.

Trusts and where they help

Trusts let you move assets out of your estate while keeping some control over how and when they pass on, useful for protecting wealth for young children or grandchildren, for a vulnerable beneficiary, or where you want to provide for a new spouse while ultimately protecting children from an earlier relationship.

They are powerful but genuinely complex. Different types of trust carry different tax treatment, and some are subject to their own periodic and exit charges, so a trust set up without proper advice can create problems rather than solve them. Used well and for the right reasons, they remain a cornerstone of estate planning, and should always be established with a solicitor and a regulated adviser working together.

Pensions and business relief

Pensions have long sat outside the estate for IHT, which made them a highly efficient way to pass on wealth. This is changing: from April 2027, most unused pension funds and death benefits are due to be brought within the scope of inheritance tax. It remains sensible to keep pensions central to your planning, but the old assumption that they are automatically IHT-free no longer holds. How you draw a pension now interacts with your estate, so it is worth reading alongside our guide to drawdown versus annuities.

Business Relief and Agricultural Relief can remove, or substantially reduce, the IHT on qualifying business and farming assets, an important consideration for owners and farmers. Note that reforms announced for April 2026 cap the fully-relieved amount and change the treatment above certain limits, so the conditions and the numbers should always be checked against current rules rather than older guidance.

A worked example

Consider a widow whose late husband left everything to her, so his allowances transferred across. Her estate is worth £1.4 million, including a £600,000 home she intends to leave to her two children. With both nil-rate bands (£325,000 each) and both residence nil-rate bands (£175,000 each) available, up to £1 million passes free of IHT. The remaining £400,000 would be taxed at 40%, a bill of £160,000.

Now suppose she begins planning early. Over several years she gifts regularly out of surplus pension income, uses her annual exemptions, and makes a larger gift to her children that she survives by seven years, between them reducing her taxable estate by £250,000. She also leaves 10% of what remains to charity. The taxable estate falls to £150,000, the charitable gift trims the rate on it from 40% to 36%, and the bill drops to around £54,000, with more reaching both her children and a cause she cared about. The figures are illustrative, but the shape of the outcome is real.

Using life cover to meet the bill

Not every estate can, or should, be shrunk below the threshold, sometimes the wealth is tied up in a home or a business the family wants to keep. In those cases a well-established approach is to insure against the bill rather than avoid it: a whole-of-life policy pays out a lump sum on death that beneficiaries can use to settle the IHT.

The crucial detail is that the policy should be written in trust. Done correctly, the payout falls outside your estate, so it does not itself add to the bill, and it reaches beneficiaries quickly, often before probate, which matters because IHT usually has to be paid before the estate can be fully released. It does not reduce the tax due, but it makes it painless to pay. Whether it is cost-effective depends on your age and health, which is exactly the kind of judgement a regulated adviser helps you weigh.

Common mistakes to avoid

• 1

  Leaving it too late

  Most effective tools reward time. Estates grow towards the frozen threshold faster than families expect.

• 2

  An out-of-date will

  Poor drafting can waste both partners’ allowances or the residence nil-rate band entirely.

• 3

  The “gift with reservation” trap

  Giving away the family home while living in it rent-free usually keeps it in your estate.

• 4

  Over-focusing on trusts

  People chase trusts as a silver bullet while overlooking the simpler wins of allowances and gifting from income.

• 5

  Forgetting who pays

  Beneficiaries often have to fund the bill before accessing the estate, which is why life cover in trust is so useful.

When to get advice

Inheritance tax planning sits where financial advice, tax and law meet, so it is one of the clearest cases for professional help. A regulated financial adviser coordinates the strategy and models the numbers; a solicitor drafts the wills and any trusts; and where matters are complex, an accountant or tax specialist checks the detail. The best outcomes come when these work together. You can explore more in our inheritance tax guides, or read our answer on what inheritance tax planning costs.

This guide is information, not personal advice, and everyone’s circumstances differ, the right approach for a £600,000 estate is not the right approach for a £3 million one with a business attached. If any of this feels relevant, the sensible next step is a conversation with a specialist. You can find vetted advisers through our Cornwall inheritance tax planning hub and across the South West. Every adviser we introduce is FCA-regulated and independently vetted, and being matched with one through us is completely free.

Common questions on inheritance tax