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How can I reduce inheritance tax?
There are several ways you may be able to reduce the inheritance tax paid by your estate when you die, depending on your circumstances and the rules in place at the time. These can include making full use of available inheritance tax allowances, ensuring assets are structured efficiently between spouses or civil partners, making gifts during your lifetime, leaving part of your estate to charity, or using certain types of trust.
Your estate is generally the total value of the money, property, and possessions you leave behind when you die, although some jointly owned assets may pass automatically to a surviving owner. From 6 April 2027, some types of unused pension savings will also form part of your estate value for inheritance tax purposes.
- £325,000 - the nil-rate band, frozen until 5 April 2031 (HMRC). This is the amount of your estate that can usually be passed on to your beneficiaries free from inheritance tax, although the amount available may be reduced if you have made certain gifts or transfers during your lifetime.
- £175,000 - the residence nil-rate band may be available if certain conditions are met. For example, if you leave a qualifying home to your direct descendants, such as your children or grandchildren, this additional allowance could apply (HMRC). It sits on top of the standard £325,000 nil-rate band, although the amount available may be reduced for estates over £2 million. For larger estates, this allowance can be reduced significantly or lost altogether.
- 40% - the inheritance tax rate payable on an estate above the nil-rate band (HMRC) after taking into account any allowances or exemptions.
- 7 years - how long you need to survive after making certain gifts in your lifetime (or making a non-exempt gift) for it to fall outside your estate (UK)
- £8.5bn - inheritance tax collected in 2025/26, a record (HMRC)
How much can I pass on free from inheritance tax?
Most people can pass on £325,000 free from inheritance tax (where no previous gifts have been made), rising to £500,000 when a residential home (which meets certain criteria) is left to their children or grandchildren. Married couples and civil partners can combine their allowances and pass on up to £1 million, where all available allowances can be used (HMRC).
|
Allowance |
Amount |
When it applies |
|
Nil-rate band |
£325,000 per person |
Available to all UK individuals. Reduced by chargeable gifts made in the previous seven years. |
|
Residence nil-rate band |
Up to £175,000 per person |
A qualifying main home passes to direct descendants such as children or grandchildren. Estates worth more than £2 million face a tapering reduction, losing £1 of the residence nil-rate band for every £2 of the estate that exceeds £2 million. |
|
Individual total |
Up to £500,000 |
The sum of both allowances where a qualifying home is left to direct descendants and all available allowances can be used. |
|
Couple total |
Up to £1 million |
Where a qualifying home is involved, the residence nil-rate band is available in full, and any unused allowances can be transferred from a deceased spouse or civil partner. |
Both allowances are frozen until 5 April 2031 (HMRC). House prices and investment values have kept rising while the thresholds have stood still, so more estates are becoming subject to inheritance tax (and more still when unused pension savings fall into the scope of inheritance tax from 6 April 2027), although most estates still do not pay it. HMRC collected a record £8.5 billion in 2025/26.
Which gifts are exempt from inheritance tax?
Some gifts leave your estate straight away. The annual exemption lets you give away £3,000 each tax year, and you can carry forward one year's unused allowance (GOV.UK).
|
Exempt gift |
Limit |
|
Annual exemption |
£3,000 per tax year |
|
Small gifts |
£250 per person, per tax year (cannot form part of a larger gift) |
|
Wedding gift from a parent |
£5,000 |
|
Wedding gift from a grandparent |
£2,500 |
|
Wedding gift from anyone else |
£1,000 |
|
Normal expenditure out of income |
No limit, if conditions are met |
|
Gifts to qualifying charities |
No limit |
Gifts from normal expenditure out of income have no upper limit. They need to be made out of income, form a regular pattern, and they must not affect your standard of living (GOV.UK). To qualify for the exemption, it’s important to keep clear records of the gifts, and they may not be assessed or accepted until after death. A couple using both annual exemptions can give away £6,000 a year, or £12,000 where the previous year is unused.
A gift you still benefit from counts as a gift with reservation and is liable to inheritance tax. For example, a home you give away stays in your estate if you carry on living there rent free (GOV.UK).
How does the seven-year rule work?
Larger gifts fall outside your estate if you live for seven years after making them (GOV.UK). There's no limit on how much you can give away, or on how many gifts you can make.
If you die within seven years, the gift is set against your nil-rate band first. Only the amount above the band is taxed, and taper relief reduces the rate on it. Taper relief only applies above the nil-rate band, so it doesn't help every gift.
|
Years between gift and death |
Rate on the amount above the nil-rate band |
|
Under three |
40% |
|
Three to four |
32% |
|
Four to five |
24% |
|
Five to six |
16% |
|
Six to seven |
8% |
|
Seven or more |
0% |
A worked example
Take an estate of £1,050,000: a £450,000 home left to adult children, and £600,000 in savings and investments.
- Allowances: £325,000 + £175,000 = £500,000
- Taxable estate: £1,050,000 − £500,000 = £550,000
- Inheritance tax at 40%: £220,000
Where it is affordable to do so, give away £300,000 more than seven years before death and the taxable estate falls to £250,000. The bill drops to £100,000, a saving of £120,000. This example is for illustration only.
The seven-year clock only starts when the gift is genuinely given away. If you keep the benefit, it stays in your estate.
Rachael Griffin, Chartered Financial Planner, Quilter
How does my Will affect inheritance tax?
Your Will determines who inherits your estate, and that can affect which inheritance tax allowances and exemptions apply. While a Will does not reduce inheritance tax on its own, its primary purpose is to ensure your assets pass to the people you choose, with inheritance tax being just one of the factors to consider.
The residence nil-rate band shows this clearly. It's only available when a qualifying main home passes to direct descendants (HMRC). If that home passes into a discretionary trust instead, the residence nil-rate band may not be available, although trusts are often used for reasons such as protecting assets or providing for loved ones.
Without a valid Will, the intestacy rules decide who inherits. Those rules differ across England and Wales, Scotland, and Northern Ireland, and may not match what you intended (GOV.UK).
Can a trust reduce inheritance tax?
A trust can sometimes help reduce inheritance tax, but that is not its only purpose, and the outcome depends on the type of trust used. Trusts are often used to protect assets, provide for loved ones, or give greater control over how wealth is passed on. The right approach depends on the balance you want between tax efficiency, access, flexibility, and control.
What happens to my pension from 6 April 2027?
From 6 April 2027, most unused pension funds and pension death benefits will count as part of your estate for inheritance tax (HMRC). Until then, money in a UK registered pension scheme sits outside your estate.
This matters if you've deliberately held your pension back to pass on. With inheritance tax rules changing, it may be worth reviewing any retirement and estate planning arrangements you've already made. Any decisions should balance what you leave behind with the income you'll need during your lifetime.
When should I start inheritance tax planning?
Earlier than most people expect, as you need to survive for seven years after making a gift for it to be exempt from inheritance tax. The seven-year rule means a gift made at 65 is outside your estate by 72. But inheritance tax should be only one part of the decision. It's also important to consider your own financial security, any dependants you support, and the legacy you want to leave behind.
Starting early gives you time to understand your position, decide what you'd like to achieve, and put a plan in place. As your circumstances, family needs, and tax rules change, that plan can be reviewed and adjusted over time. Quilter research found that 35% of people say navigating tax complexity is a reason to seek financial advice (Quilter, Value of Advice).
Frequently asked questions
No. Gifts between spouses and civil partners are exempt from inheritance tax, whatever the amount, where both are UK long-term residents (HMRC). Anything you leave your spouse or civil partner also passes without using your allowances, and your unused allowances transfer to them, although they may need to be claimed rather than passing automatically.
People with larger estates are more likely to rely on a combination of planning strategies. These can include gifting, trusts, making use of available reliefs and exemptions, and protection solutions designed to help meet a future inheritance tax liability. Many also choose to help younger generations during their lifetime, rather than passing all of their wealth on through their estate.
Relief may still be available where the relevant qualifying conditions are met, although the rules have changed and the amount of relief available may depend on your circumstances. If you hold business or agricultural assets, it's worth reviewing any existing plans to understand how the current rules apply.
Making an outright gift of your home may help reduce inheritance tax if certain conditions are met. To be effective, the gift generally needs to be made without continuing to benefit from the property. For example, if you give your home to your children but continue living there rent free, it may still be treated as part of your estate for inheritance tax purposes under the gift with reservation rules (GOV.UK). It's also important to consider other tax consequences, as well as the wider impact on you and your family.
Approver Quilter October 2026
