Inheritance Tax (IHT) planning

Have you ever wondered how much of the wealth you have worked hard to build will eventually go to your family, and how much could be lost to tax?

For many people, buying a home, building a business and saving for retirement take years of hard work. Naturally, when the time comes to pass that wealth on to children or other loved ones, most people want to make sure their family receives as much as possible.

This is where Inheritance Tax (IHT) planning becomes important.

In the UK, Inheritance Tax is sometimes referred to as the death tax because it can be charged on the estate of someone who has died. However, what many people do not realise is that certain transfers made during their lifetime can also trigger an Inheritance Tax charge.

The good news is that there are legitimate ways to reduce the amount of Inheritance Tax your family may have to pay. These include making gifts, using available allowances, reviewing your will and planning carefully around your property, investments and pension.

In this blog, I want to explain how Inheritance Tax works for the 2026–27 tax year, using practical examples to help you understand what you can do to protect the wealth you leave behind.

My advice is simple: do not wait until it is too late to start planning your estate. The earlier you understand the rules, the more options you may have.

1. What is Inheritance Tax, and who has to pay it?

Inheritance Tax is a tax that may be payable on a person’s estate when they die.

An estate generally includes their property, savings, investments and other assets, after taking account of relevant debts, exemptions and reliefs.

The standard rate of Inheritance Tax on an estate is 40% on the taxable amount above the available tax-free thresholds. A reduced rate of 36% may apply to qualifying parts of an estate if at least 10% of the relevant net estate is left to charity.

Inheritance Tax can also arise during someone’s lifetime, particularly when they transfer assets into certain trusts.

One important point to understand is that not everyone who dies in the UK will have an Inheritance Tax bill.

The amount due depends on the value of the estate, the assets involved, the available allowances and the person’s circumstances.

For example, imagine that David dies leaving an estate worth £500,000. If he has the standard £325,000 tax-free allowance available, no other reliefs apply and the estate does not qualify for an additional residence allowance, the calculation would be:

In this simplified example, David’s estate would have an Inheritance Tax liability of £70,000.

That is a significant amount of money. With appropriate planning, some people may be able to reduce or eliminate the tax payable.

2. What are the Inheritance Tax thresholds for 2026–27?

Before considering how to reduce Inheritance Tax, it is important to understand the allowances available.

For the 2026–27 tax year, the main thresholds remain as follows:

The standard nil-rate band of £325,000 is available subject to the usual rules.

The residence nil-rate band is an additional allowance that may be available when a qualifying home is inherited by direct descendants, such as children, grandchildren or certain other qualifying descendants. It is subject to conditions and a taper for larger estates.

The residence nil-rate band starts to reduce when the value of the estate exceeds £2 million, falling by £1 for every £2 above that threshold.

Example: How a family could pass on £1 million without Inheritance Tax

Suppose Mary and John are married and own a home together. They have children and want their estate to pass to them.

If both spouses have their full nil-rate bands and residence nil-rate bands available, and the relevant conditions are met, their combined allowances could potentially reach £1 million.

This is because unused allowances can generally be transferred from a deceased spouse or civil partner to the survivor.

However, the result depends on how the assets are owned, the terms of the wills, whether the residence conditions are satisfied and whether the allowances have already been used.

This is why I encourage people to review their wills and estate arrangements rather than assume that being married automatically means their family will not pay Inheritance Tax.

You can read more about the thresholds in the official HMRC Inheritance Tax guidance.

3. Does being domiciled in the UK mean you must pay Inheritance Tax?

This is an important question, particularly for people who have lived in different countries or own property overseas.

In my original explanation of Inheritance Tax, I focused on domicile of origin, domicile of dependence and domicile of choice. These were important concepts under the previous rules.

However, the rules changed from 6 April 2025.

For Inheritance Tax purposes, the UK now generally uses a long-term UK residence test to determine whether an individual’s overseas assets may fall within the scope of UK Inheritance Tax.

Broadly, an individual may be considered a long-term UK resident if they have been UK tax resident for at least 10 of the previous 20 tax years. Special rules apply when someone leaves the UK, and their circumstances and residence history must be considered carefully.

For example, imagine that Sarah was born overseas, moved to the UK many years ago and now owns a house in the UK as well as investments in her country of birth.

She should not assume that her overseas investments are automatically outside the scope of UK Inheritance Tax simply because she was born abroad or considers another country to be her permanent home.

Her UK tax residence history and the rules applicable to her circumstances need to be reviewed.

The treatment of UK-situated assets and certain other assets can also differ from the treatment of overseas assets.

My advice is to obtain professional guidance if you have international connections, especially if you are planning to move abroad, have recently arrived in the UK or own assets in more than one country.

You can find more information here: Inheritance Tax if you are a long-term UK resident.

4. How can you reduce Inheritance Tax by making gifts during your lifetime?

One of the most common ways to reduce the value of your estate is to give money or assets to other people while you are still alive.

However, there are rules you must understand before making substantial gifts.

An outright gift to an individual is generally treated as a potentially exempt transfer. If you survive for seven years after making the gift, it will normally fall outside your estate for Inheritance Tax purposes, provided no special rule applies.

If you die within seven years, the gift may still be relevant when calculating Inheritance Tax.

Example: Giving money to your children

Imagine that Robert has an estate worth £800,000. He wants to help his daughter buy her first home, so he gives her £100,000.

If Robert survives for more than seven years after making the gift, the gift will normally be outside his estate for Inheritance Tax purposes.

If he dies within seven years, the gift may need to be considered when calculating the tax due.

The outcome will depend on the total value of his gifts, the available nil-rate band, any other assets in his estate and the relevant exemptions.

There is an important detail here: the seven-year rule does not mean that every gift becomes taxable if you die within seven years. It means that gifts may need to be taken into account when determining whether tax is due and how much.

I would also encourage anyone making a substantial gift to consider their own financial security. Giving away money purely to reduce tax can create problems if you later need that money to pay for living expenses, care or unexpected costs.

What is taper relief?

If a potentially exempt gift becomes chargeable because the donor dies within seven years, taper relief may reduce the Inheritance Tax payable on the gift.

The relief applies to the tax on a gift, not directly to the value of the gift.

These effective rates illustrate the effect of taper relief where tax is due at the standard 40% rate. Taper relief is generally relevant only when the total chargeable gifts exceed the available nil-rate band.

This is why it is important to keep records of gifts and the dates on which they were made.

5. What gifts can you make without paying Inheritance Tax?

Not every gift requires you to wait seven years. Several exemptions may allow you to give money away without it being included in your estate for Inheritance Tax purposes.

The annual gift allowance

You can generally give away a total of £3,000 in each tax year under the annual exemption.

You may give the full amount to one person or divide it among several people.

If you did not use the previous tax year’s annual exemption, you may be able to carry it forward for one tax year.

For example, if you have not used your annual exemption in either of the relevant years, you could potentially give away £6,000 using the current year’s allowance and the unused allowance carried forward from the previous year.

Small gifts of up to £250

You can generally give as many gifts of up to £250 per person as you wish in a tax year, provided you have not used another Inheritance Tax exemption on the same person for that gift.

For example, you may give £200 to a friend and £150 to another relative, subject to the rules.

Wedding and civil partnership gifts

Certain gifts made to celebrate a marriage or civil partnership can qualify for exemption, up to the applicable limits:

• £5,000 to a child.
• £2,500 to a grandchild or great-grandchild.
• £1,000 to another person.

The gift must satisfy the relevant conditions.

Regular gifts from income

Another useful exemption covers regular gifts made from your normal income.

You may be able to give money regularly to help your children or other family members with their living expenses without the gifts being subject to Inheritance Tax.

However, the payments must form part of your normal expenditure, be made from income rather than capital, and leave you with enough income to maintain your usual standard of living.

For example, imagine that you receive a pension and rental income each month and have enough left over after paying your bills. You might be able to help your daughter with regular childcare costs or rent.

If the payments satisfy the exemption’s conditions and you keep appropriate records, they may fall outside your estate for Inheritance Tax purposes.

You can read more about the rules in HMRC’s guidance on gifts and Inheritance Tax.

6. Can giving your home to your children reduce Inheritance Tax?

This is one of the questions I would encourage homeowners to approach with particular care.

You may think that transferring your home to your children while you are alive is a straightforward way to reduce the value of your estate.

Unfortunately, it is not always that simple.

If you give your home to your children but continue living in it without paying a full market rent, the gift may be treated as a gift with reservation of benefit.

This means the property may still be included in your estate for Inheritance Tax purposes, even if the legal ownership has changed.

For example, imagine that Peter transfers his £400,000 home to his son but continues living there rent-free.

Although the property is now registered in his son’s name, Peter may still benefit from it. The gift may therefore fail to achieve the intended Inheritance Tax saving.

There may also be other consequences to consider, including Capital Gains Tax, Stamp Duty Land Tax in relevant circumstances and the legal implications of giving away ownership of your home.

My advice is not to transfer your home to your children without obtaining professional legal and tax advice first.

You can find more information about gifts with reservation of benefit.

7. Can you reduce Inheritance Tax by leaving assets to your spouse?

Transfers between spouses and civil partners are generally exempt from Inheritance Tax, subject to the applicable rules.

This means you can often leave assets to your husband, wife or civil partner without an immediate Inheritance Tax charge.

However, this does not necessarily eliminate Inheritance Tax when the surviving spouse later dies.

For example, suppose James leaves his entire estate to his wife, Linda. The transfer may qualify for the spouse exemption.

When Linda later dies, the assets she owns may form part of her estate. Depending on the value of the estate and the allowances available, Inheritance Tax could then become payable.

A properly planned will can help make use of available allowances and ensure that your assets pass according to your wishes.

For married couples and civil partners, unused nil-rate band and residence nil-rate band allowances can generally be transferred to the survivor, subject to the rules.

This is another reason why reviewing your will is an important part of estate planning.

8. What about Inheritance Tax on businesses and agricultural property?

If you own a business, shares in a company or agricultural property, there may be additional reliefs available.

Business Relief and Agricultural Relief can reduce the Inheritance Tax payable on qualifying assets, but the rules are detailed and not every business or property qualifies.

For the 2026–27 tax year, significant changes apply from 6 April 2026.

A combined allowance of £2.5 million is available for qualifying agricultural and business property that would otherwise qualify for 100% relief. Qualifying value above the available allowance generally receives relief at 50%, subject to the rules. Certain shares also have specific restrictions.

For example, imagine that a business owner has £3 million of qualifying business and agricultural property and has the full £2.5 million allowance available.

The first £2.5 million may qualify for 100% relief, while the remaining £500,000 may qualify for 50% relief.

This is only an illustration: the actual tax treatment depends on the type of assets, eligibility conditions, previous transfers and any other applicable rules.

If you own a family business or farm, I would strongly recommend reviewing your estate plan in light of these changes.

More information is available in HMRC’s guidance on Business Relief and Agricultural Relief.

9. Will your pension be subject to Inheritance Tax?

This is another important development that people should consider when planning their estate.

From 6 April 2027, most unused pension funds and pension death benefits are due to be brought within the value of a person’s estate for Inheritance Tax purposes, subject to specific exceptions.

This means that someone planning their estate during 2026–27 should not assume that unused pension funds will always sit outside their estate for Inheritance Tax purposes.

For example, imagine that Helen has £300,000 in savings and investments, a home worth £500,000 and an unused pension fund worth £250,000.

Depending on the pension arrangements and the applicable rules, the inclusion of the pension fund from April 2027 could materially change the calculation of her estate for Inheritance Tax purposes.

Her family should therefore review her pension arrangements, will and wider estate plan.

You can read the official guidance here: Inheritance Tax on unused pension funds and death benefits.

10. Can you use a trust to reduce Inheritance Tax?

Trusts can be useful in some estate-planning situations, particularly where you want to control how assets are managed or when beneficiaries receive them.

However, putting assets into a trust does not automatically make them exempt from Inheritance Tax.

Depending on the type of trust and the value transferred, an immediate lifetime Inheritance Tax charge may arise. There may also be periodic charges, exit charges and other tax consequences.

For example, a parent may want to place money in a trust for a child who is too young to manage a large inheritance. A trust may help achieve that objective, but the tax treatment must be considered before assets are transferred.

I would recommend obtaining specialist advice before setting up a trust purely for tax reasons.

11. A practical Inheritance Tax planning checklist

If you are concerned about the amount of Inheritance Tax your family might have to pay, here are some practical steps I would recommend considering.

• Review your estate: Make a realistic list of your property, savings, investments, business interests and other assets, together with relevant debts.
• Check your allowances: Establish whether you have unused nil-rate band or residence nil-rate band allowances available.
• Review your will: Make sure it reflects your wishes and takes account of your family circumstances.
• Consider lifetime gifts: Explore whether you can afford to make gifts using the available exemptions or the seven-year rule.
• Keep records: Document the dates, values and recipients of gifts, as well as evidence of regular gifts made from income.
• Review property and business assets: Check whether any reliefs apply and understand the changes introduced from April 2026.
• Review your pension: Consider the rules coming into effect from April 2027.
• Seek professional advice: Inheritance Tax planning can involve several taxes and legal considerations, so professional guidance can be valuable.

The most important thing is to make decisions that suit your circumstances rather than giving away assets simply to reduce tax.

Conclusion: Start planning today to protect the wealth you leave behind

Thank you for taking the time to read my blog.

I hope this article has helped you understand how Inheritance Tax works in the UK and some of the legitimate ways you may be able to reduce the amount payable on your estate.

For me, the key message is that estate planning should not be left until the last minute. Whether you own a home, have built a successful business, hold investments or simply want to provide financial support for your children, understanding the rules can help you make more informed decisions.

There is no single solution that works for everyone. The right approach depends on your assets, family circumstances, residence history and long-term financial needs.

If you are concerned about Inheritance Tax and would like help understanding your options, we offer a 30-minute initial consultation to discuss your circumstances and the steps you could consider taking.

Please contact us to arrange a conversation about planning ahead and protecting the wealth you have worked hard to build.

Disclaimer: This article provides general information about UK Inheritance Tax for the 2026–27 tax year. It is not a substitute for individual tax or legal advice. Tax rules, exemptions and reliefs depend on your circumstances and may change. Please check the latest HMRC guidance or seek professional advice before making decisions about gifts, property, pensions or trusts.