Inheritance Tax Planning UK 2026/27— 10 Legal Ways to Reduce Your IHT Bill

IHT Thresholds for 2026/27

The NRB has been frozen at £325,000 since 2009 and is set to remain frozen until at least April 2030. With rising property and asset values, an increasing number of estates are becoming liable for IHT — making planning more important than ever.

Strategy 1: Use Your Annual Exemption (and Carry Forward)

Every individual can give away £3,000 per tax year completely free of IHT. This is the annual exemption. If you did not use it last year, you can carry it forward by one year, meaning you can give away up to £6,000 in one year.

For a couple, this doubles: up to £6,000 per year (or £12,000 if carrying forward). Used consistently over many years, this is a powerful way to reduce an estate gradually without any complex planning.

Strategy 2: Small Gifts Exemption (£250 per Person)

Separately from the annual exemption, you can give up to £250 per year to any number of different people, completely free of IHT. You cannot give £250 to the same person you have already used the annual exemption for in the same year.

For families with many children, grandchildren and friends, this exemption enables substantial cumulative gifting — for example, £250 to each of 10 grandchildren would be £2,500 per year, completely outside the estate.

Strategy 3: Wedding and Civil Partnership Gifts

Gifts made on or shortly before a wedding or civil partnership are exempt up to the following limits:

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

The gift must be made before the ceremony and is conditional on the marriage or civil partnership taking place. If the wedding is called off, the exemption does not apply.

Strategy 4: Normal Expenditure Out of Income

This is one of the most powerful and underused IHT exemptions, with no annual limit. Regular gifts made from surplus income — not capital — can be fully exempt from IHT, provided:

1. The gifts form part of your normal expenditure pattern (they should be regular, not one-off)
2. They come from income, not from capital assets
3. After making the gifts, you retain sufficient income to maintain your usual standard of living

Retirees with pension income, investment dividends or rental income above their spending needs are ideal candidates. A detailed record of income and expenditure (including the gifts) is essential to prove the exemption applies — HMRC scrutinises these claims closely.

Strategy 5: Potentially Exempt Transfers (PETs) and the 7-Year Rule

Outright gifts to individuals (not trusts) are called Potentially Exempt Transfers (PETs). A PET becomes fully exempt from IHT if you survive for 7 years after making the gift. If you die within 7 years, the gift is brought back into your estate.

However, taper relief reduces the IHT on PETs where death occurs between 3 and 7 years after the gift:

Note: taper relief reduces the tax on the PET, not the amount of the gift — so it is only relevant when the PET plus the rest of the estate exceeds the nil rate band.

Strategy 6: Whole-of-Life Insurance in Trust

A whole-of-life insurance policy written in trustpays out on death and the proceeds go directly to the trust beneficiaries — outside the deceased's estate. This means no IHT on the policy proceeds.

The policy is typically sized to cover the estimated IHT liability, so beneficiaries receive both the estate (reduced by IHT) and the policy payout (IHT-free) as compensation. The premiums are paid by the deceased and count as gifts — but if regular and from income, they may qualify for the normal expenditure exemption.

This strategy does not reduce IHT but funds the liability without forcing beneficiaries to sell assets (such as a family home) to pay the bill.

Strategy 7: Business Relief (100% and 50%)

Business Relief (formerly Business Property Relief or BPR) reduces the IHT value of qualifying business assets:

• 100% relief: Shares in unlisted trading companies; shares in AIM-listed trading companies; interests in qualifying trading partnerships; sole trader businesses and related assets.
• 50% relief: Shares controlling more than 50% of a listed trading company; land, buildings, plant or machinery used in a qualifying business owned by a partner or controlling shareholder.

The assets must have been owned for at least 2 years before death. Investment companies (holding property or shares without active trading) generally do not qualify. HMRC scrutinises Business Relief claims carefully.

Strategy 8: Charitable Donations (Reduces Rate to 36%)

If you leave at least 10% of your "baseline" estate to a UK registered charity, the IHT rate on the taxable portion of your estate reduces from 40% to 36%. The "baseline" is roughly the net estate after deducting the nil rate band.

Counterintuitively, this can mean that leaving more to charity results in your family receiving more after tax — because the 4% rate reduction on the remainder may offset the additional charitable gift. Running the numbers carefully (or consulting an adviser) is essential to identify the optimal donation level.

Gifts to charity are always completely exempt from IHT regardless of size, so even without the 36% rate reduction, charitable giving is a highly tax-efficient element of estate planning.

Strategy 9: Pensions as Non-IHT Assets (Changing April 2027)

Currently, defined contribution (DC) pension funds are outside your estatefor IHT. This has made pensions one of the most tax-efficient ways to pass wealth: you spend other assets first and leave your pension untouched for beneficiaries.

However, the government announced in Autumn Budget 2024 that unspent pension funds will be brought into estates for IHT from April 2027. If this takes effect as planned, pension death benefits will become subject to IHT, fundamentally changing how pensions should be used in estate planning.

Strategy 10: Deed of Variation After Death

If you have already inherited assets from someone who has died — or you are the executor of an estate — a deed of variation can redirect inherited assets within 2 years of the death. HMRC treats the variation as if the deceased had made the gift, which can:

• Redirect assets to a charity (creating an IHT exemption on that portion)
• Use nil rate bands more efficiently across the estate
• Pass assets to grandchildren (skipping a generation) without additional IHT

The deed must be in writing, signed by all affected beneficiaries within 2 years of the death, and must include a statement that the IHT and/or CGT provisions apply. It cannot be used to redirect assets away from someone who refuses to consent.

The Probate and IHT Process

When someone dies, the executor of their estate must calculate the IHT due and submit an IHT account to HMRC. For simple estates below the threshold, a shorter form (IHT205 or its online equivalent) may suffice. For larger or more complex estates, the full IHT400 must be submitted along with supplementary schedules for each type of asset.

IHT is generally due 6 months from the end of the month in which death occurred. Interest accrues on unpaid IHT after this date. However, IHT on land, property and certain business assets can be paid in annual instalments over 10 years.

Probate (the legal authority to deal with the estate) cannot normally be obtained until at least part of the IHT is paid. This can create a "catch-22" where assets are locked in the estate but the estate needs those assets to pay IHT. HMRC can arrange for IHT to be paid directly from a deceased's bank account through the Direct Payment Scheme.

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