Inheritance Tax UK 2026: How to Reduce Your Bill

Inheritance Tax (IHT) is charged at 40% on the value of your estate above the nil-rate band. With thresholds frozen until 2030 while property values continue to rise, an increasing number of ordinary families are being pulled into the IHT net.

The good news: with proper planning, most families can significantly reduce — and in many cases eliminate — their IHT liability. Here is how.

The Current IHT Thresholds (2026/27)

• Nil-rate band: £325,000 (frozen until 2030)
• Residence nil-rate band (RNRB): £175,000 — available when a main residence is left to direct descendants
• Combined threshold (individual): up to £500,000
• Combined threshold (married couple/civil partners): up to £1,000,000
• Rate above threshold: 40%
• Reduced rate: 36% if at least 10% of net estate is left to charity

Seven Ways to Reduce Your IHT Bill

1. Make Use of the Annual Gift Exemption

You can give away up to £3,000 per year free of IHT. If you didn't use last year's exemption, you can carry it forward once — giving you £6,000 in the first year. Small gifts of up to £250 per person per year are also exempt.

2. Gifts Out of Normal Income

Gifts made regularly from surplus income (not from capital) are immediately exempt from IHT — regardless of amount. This is one of the most underused reliefs available. You must be able to demonstrate the gifts are habitual and made from income, not capital.

3. The Seven-Year Rule

Any gift made more than seven years before your death is fully exempt from IHT. Gifts made within seven years may be partially exempt, on a sliding scale called "taper relief". This makes early gifting — to children, grandchildren or others — a powerful IHT planning tool.

4. Potentially Exempt Transfers (PETs)

Gifts to individuals (as opposed to trusts) become fully exempt if you survive seven years from the date of the gift. Consider making substantial gifts now if you are in good health.

5. Trusts

Assets placed into a trust are removed from your estate (subject to the seven-year rule in some cases). Discretionary trusts are particularly useful for protecting assets for future generations while reducing your IHT exposure.

6. Business Property Relief (BPR)

Business assets — including shares in qualifying AIM-listed companies — can attract 100% BPR, meaning they pass entirely free of IHT. This has made AIM shares a popular IHT planning tool.

7. Pension Planning

Pension funds are generally outside of your estate for IHT purposes. Spending other assets in retirement while preserving your pension can significantly reduce your IHT bill. Note: the government has announced changes to pension IHT treatment from 2027.

FAQs

Does my spouse inherit everything tax-free?

Yes — assets passing between married couples and civil partners are fully exempt from IHT, regardless of value. Additionally, any unused nil-rate band transfers to the surviving spouse, potentially doubling the threshold to £650,000 (or £1,000,000 with the RNRB).

What if my estate is under the threshold?

If your estate (including any gifts made in the last 7 years) is below the nil-rate band, no IHT is due. However, it is worth reviewing this periodically as property values rise.

Is IHT planning only for the wealthy?

No. Any homeowner in southern England with a property worth over £325,000 may have an IHT exposure. Planning is relevant for most property owners in London and the South East.