Inheritance Tax Planning Strategies for 2026/27 — Act Before April 2027

How UK Inheritance Tax works

Inheritance Tax (IHT) is charged on the value of your estate when you die. The current rates and thresholds for 2026/27 are:

Additionally, the Residence Nil-Rate Band (RNRB) of £175,000 applies when a main home is left to direct descendants. This brings the effective IHT-free threshold to:

The RNRB is gradually tapered away for estates worth more than £2 million — removed at £1 for every £2 of excess. It disappears entirely at estates of £2.35 million.

CRITICAL: The April 2027 pension change — act now

This is the single most significant IHT planning development for the coming years.

Currently (to April 2027): Unspent pension funds pass outside your estate for IHT purposes. A £500,000 pension pot is IHT-free — no matter who you nominate as beneficiary. This made pensions one of the most effective IHT planning tools for higher-wealth individuals.

From April 2027: Unspent pension funds will be included in the estate for IHT calculation. The pension provider will be responsible for paying any IHT due before the remainder passes to beneficiaries.

The impact:

This change affects millions of people — particularly those in defined contribution pension schemes who have deliberately avoided drawdown to pass wealth to children.

What to consider before April 2027:

• Review whether you should draw down more of your pension now (paying income tax at your marginal rate) to reduce the IHT estate.
• Consider whether gifts from pension drawdown proceeds could make use of the 7-year rule.
• Revisit your expression of wishes / nomination form to ensure beneficiary nominations are up to date.

Strategy 1: The 7-year rule for gifts

Any gift to an individual made more than 7 years before death is completely outside the estate for IHT purposes. These are called Potentially Exempt Transfers (PETs).

If you die within 7 years, the gift may be added back to your estate, but taper relief reduces the effective IHT charge:

Note: taper relief reduces the tax on the gift, not the value of the gift itself. The NRB is used first — gifts above the NRB are taxed, with taper relief applying to that taxable amount.

Warning: Gifts with Reservation of Benefit (GWR) — where you continue to benefit from the asset (e.g. living in a house you gifted) — do not qualify as PETs. The gift must genuinely transfer.

Strategy 2: Annual exemptions and small gifts

You have several annual gifting exemptions that are immediately outside the estate (no 7-year wait):

The regular gifts from normal income exemption is particularly powerful for higher earners. If you can demonstrate that gifts are made from surplus income (after maintaining your own standard of living), they are immediately exempt with no cap. HMRC requires evidence of regular pattern and income documentation.

Strategy 3: Business Property Relief (BPR)

Business Property Relief provides 100% IHT relief on qualifying assets:

• Shares in an unquoted trading company (including AIM-listed shares after 2 years).
• A sole trade or partnership business (after 2 years of ownership).
• Land, buildings, or machinery used in a qualifying business.

From April 2026: BPR is capped at £1 million at the 100% rate. Qualifying assets above £1 million receive only 50% relief.

For business owners, this change makes early planning more important — if the business is likely to exceed £1 million in value, consider whether lifetime transfers, trusts, or other structures are appropriate.

Strategy 4: Life insurance written in trust

Life insurance proceeds paid to your estate are subject to IHT. However, if you write the policy in trust, the proceeds pass directly to the trust beneficiaries and are outside your estate entirely.

• No IHT on the policy proceeds.
• No probate delay — the trust pays out without waiting for grant of probate.
• Beneficiaries can receive funds immediately to pay any IHT due on the rest of the estate.

Setting up a policy in trust is straightforward — most life insurance providers offer their own trust deed, or your solicitor can draft one. It takes one form and costs nothing extra. This is one of the simplest, most-overlooked IHT planning steps available.

Strategy 5: Spouse and civil partner exemption

Transfers between UK-domiciled married couples and civil partners are completely exempt from IHT — both during life and on death. Additionally:

• Unused nil-rate band transfers to the surviving spouse: if you die with only £200,000 in your estate, £125,000 of unused NRB transfers to your spouse's estate.
• The RNRB is also transferable: if neither used their RNRB in full, the survivor gets the combined benefit.

This makes early estate planning especially powerful for married couples — both NRBs and both RNRBs can be maximised if planning is done correctly.

Worked example — married couple with a home

David and Mary. Estate: £900,000 house + £300,000 other assets = £1,200,000 total.

With standard planning:

• David's NRB: £325,000
• David's RNRB: £175,000
• Transferred to Mary's estate: both NRBs and RNRBs.
• Mary's estate: £1,200,000.
• Available allowances: £325,000 + £175,000 + £325,000 + £175,000 = £1,000,000.
• Taxable: £1,200,000 − £1,000,000 = £200,000.
• IHT: 40% × £200,000 = £80,000.

Without using the full NRB efficiently, IHT could be significantly higher. A will drafted to use both nil-rate bands optimally — and ensuring the home qualifies for RNRB by leaving it to children — is essential.

Sources

• HMRC: Inheritance Tax thresholds and rates
• HMRC: Gifts and Inheritance Tax
• HMRC: Business Relief for Inheritance Tax
• HM Treasury: Autumn Budget 2024 — pension IHT changes
• HMRC: Residence nil rate band

This article provides general information only. Estate planning decisions should be discussed with a qualified solicitor or independent financial adviser.