Inheritance Tax Planning Guide

Inheritance tax (IHT) is always a topical issue, but thanks to rising property prices and frozen thresholds, it is now affecting an increasing number of households across the UK. In fact, people who would never have thought of themselves as wealthy are now finding their estates may face a significant tax bill and, from April 2027, unused pensions and pension benefits could be drawn into that calculation too.

With that in mind, this inheritance tax planning guide UK helps you get clear on what inheritance tax is, how it’s calculated, the inheritance tax thresholds for 2026/27 and the most effective inheritance tax planning UK strategies that can help you reduce your IHT bill.

What is Inheritance Tax?

Before you can protect your estate by reducing your IHT bill, it’s essential to understand what inheritance tax is and how quickly it can add up. 

Simply put, inheritance tax (IHT) is the tax on the value of your estate, meaning everything you own, when you pass away, after deducting debts and liabilities. It applies only to the portion above the tax-free threshold. 

The standard rate is 40%, or 36% if you leave at least 10% of your net estate to charity. To put that into context, a £1 million taxable estate could face an eye-watering IHT bill of £400,000. 

The inheritance tax thresholds for 2026/27

In essence, these current thresholds mean that it’s possible for a person to pass on £325,000 tax-free. This is known as the nil-rate band (NRB) and it has been frozen since 2009. Anything above that is subject to IHT. Married couples or civil partners can combine allowances, therefore passing on up to £650,000 tax-free between them with the NRB. 

In addition, the Residence Nil-Rate Band (RNRB) allows up to £175,000 extra when leaving your main home to children or descendants, which is also transferable between spouses. It has been frozen since 2020. Together, this means a couple can leave up to £1 million tax-free under 2026/27 rules. Both the NRB and RNRB are frozen until at least 2030. 

The RNRB also tapers away for larger estates: it reduces by £1 for every £2 the net estate exceeds £2 million, disappearing entirely at £2.35 million for a single person. This matters increasingly as more estates, particularly those with valuable property, edge closer to that threshold. 

How the transferable nil-rate band works in practice 

This is one of the most useful, and most commonly misunderstood, parts of IHT planning for couples. Imagine this situation:  

David died in 2020 leaving his entire estate to his wife Margaret. No IHT was due, since transfers between spouses are exempt and none of David’s NRB was used. When Margaret dies in 2026 with an estate of £700,000 including her home, David’s unused NRB transfers to her. Her available NRB is therefore £650,000, being her own £325,000 plus David’s transferred £325,000.

No IHT is due on an estate of £700,000, as that includes the NRB and RNRB in this simplified example. The couple’s descendants would save £150,000 compared with what would have been owed without the transfer.   

Have you checked whether your own estate would benefit from a spouse’s unused allowances in the same way? 

How to value an estate for inheritance tax 

Understanding how to value an estate for IHT is a key foundation of inheritance tax planning strategies. To calculate potential IHT, total your: 

• Property 
• Investments 
• Cash 
• Business interests 
• Life insurance policies not held in a trust 
• Valuables such as jewellery, vehicles or art 
• Gifts made in the seven years before death, and in some cases up to 14 years where earlier gifts into trust are involved 
• Pensions. At the time of writing, pensions do not currently fall within your estate, but will do from April 2027 

From there, you can then deduct liabilities such as funeral costs, mortgages or other debts. It’s worth noting that legal fees, probate costs and executor expenses do not reduce the IHT calculation itself, though they are paid from the estate before beneficiaries receive their inheritance. 

In some cases involving gifts into discretionary trusts made before gifts to individuals, HMRC looks back 14 years rather than seven for IHT purposes. The seven-year rule is where Potentially Exempt Transfers (PETs) fall outside a person’s estate for calculating the final IHT due.  

Another point worth noting: HMRC can request evidence of estate valuations for up to 20 years after death. Keeping contemporaneous records such as property valuations, bank statements, and share certificates is crucial for executors. 

The IHT liability by estate value 

Here’s a brief overview of how much inheritance tax could be due on estates of rising value. The figures below are illustrative only, assuming current allowances for an individual, not a couple. Actual IHT depends on individual circumstances, including gifts made, reliefs available and whether a spouse’s unused allowances transfer. 

These figures show how quickly the numbers add up and how valuable the Residence Nil-Rate Band can be for keeping wealth within your family. Do note that these are simplified figures only, with the full £175,000 RNRB available.

Who pays Inheritance Tax and when?

The executor of the will is responsible for ensuring that any IHT due is paid. IHT is paid with funds from the estate and it must be paid within six months of the end of the month of a person’s death. HMRC charges interest on late payments. 

There is one exception worth knowing about: IHT on gifts made in the seven years before death is paid by the recipient of the gift if the estate does not have sufficient funds to cover it, rather than by the estate itself. 

HMRC allows IHT on certain assets, including qualifying land and buildings, to be paid in instalments over up to 10 years. Interest can apply to outstanding instalments, although specific rules apply to qualifying assets receiving Agricultural Relief or Business Relief.  

If an estate is asset-rich but cash-poor, this six-month timeframe can cause real problems. With advance planning, such as using life insurance written in trust, you can ensure funds are available when needed, avoiding the need to sell assets you want your heirs to keep. 

Inheritance tax on gifts

Gifting can be one of the most effective ways to reduce the value of your estate for Inheritance Tax (IHT) purposes. But the rules around gifts are not always straightforward and not every gift immediately falls outside your estate. 

There are several types of gifts that can be made free from IHT. Gifts between spouses and civil partners are completely exempt, with no limit on the amount that can be transferred. There is also an annual exemption of £3,000 per person, which can be carried forward by one year if it is not used. You can also make small gifts of up to £250 per person each tax year, provided the recipient has not benefited from another exemption. 

Wedding and civil partnership gifts have their own allowances: £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else. 

There is another potentially valuable exemption for those who have sufficient income to make regular gifts without affecting their normal standard of living. These are known as gifts out of surplus income. There is no set monetary limit, but strict conditions apply, so it is important to keep good records and take advice. 

Gifts to UK-registered charities are also completely exempt from IHT. 

But what happens if you want to give away more than these allowances? 

Potentially Exempt Transfers (PETs) 

Gifts above the available exemptions made directly to individuals are generally known as Potentially Exempt Transfers, or PETs. They become fully exempt from IHT if the donor survives for seven years after making the gift. 

If the donor dies within seven years, the position can be more complicated. Taper relief may reduce the amount of IHT due where the gift was made more than three years before death, although the rules depend on the size and nature of the gift and the available nil-rate band. 

For a closer look at how this works, see our guide to the seven-year rule.

Chargeable Lifetime Transfers 

Gifts into certain trusts, particularly discretionary trusts, are treated differently. These are known as Chargeable Lifetime Transfers (CLTs) and can be subject to an immediate IHT charge at 20% where the value exceeds the available nil-rate band. 

This is one reason why trust planning needs careful consideration before assets are transferred. You can find out more in our guide to trusts and inheritance tax. 

There is also an important rule to remember when making gifts: you cannot simply give something away on paper and continue enjoying the benefit yourself. 

If, for example, you give your home to your child but continue to live there rent-free, the property may still be treated as part of your estate. This is known as a gift with reservation of benefit. 

For a full explanation of the different gifting allowances and exemptions, see our article on how much you can gift tax-free in the UK. 

Quick Succession Relief 

Sometimes, the same assets can pass through two estates within a relatively short period. That might sound like a recipe for being taxed twice. Without relief, that could be the outcome. 

Quick succession relief is designed to reduce this problem. 

Imagine a parent leaves £500,000 to their adult child. IHT is paid on the parent’s estate. If the child then dies within five years and the same assets form part of their estate, IHT could otherwise be charged again. 

Quick succession relief reduces the IHT payable on the second estate. The amount of relief depends on how long has passed between the two deaths: 

This can be particularly relevant where elderly relatives die in relatively close succession, which is a situation that is more common than many people realise. 

It is another good example of why estate planning needs to look beyond a single person’s tax position. What happens to an inheritance after it has been received can be just as important as what happens when it is first passed on. 

The April 2027 pension change and what it means 

Pensions have traditionally been an extremely useful part of IHT planning. 

 Until April 2027, most defined contribution pension pots and associated death benefits sit outside the estate for IHT purposes. This has made pensions an attractive way of passing wealth to beneficiaries. In particular, pensions such as SIPPS in inheritance tax planning (UK wise) have been an important consideration for individuals looking at how pension wealth can form part of their wider estate planning strategy 

That is changing. 

From 6 April 2027, unused pension funds and death benefits will generally be brought within the estate for IHT assessment. The personal representative of the estate, rather than the pension scheme administrator, will be responsible for reporting and paying any IHT due on pension assets. 

For anyone with a significant defined contribution pension who has been planning to leave that wealth to their beneficiaries, this is a major change. 

It also means that retirement income strategies may need another look. For example, someone approaching retirement might previously have chosen to fund their living costs from an ISA while leaving their pension untouched for beneficiaries. From April 2027, using pension income for living costs instead could reduce the value of the pension remaining in the estate. This is why using ISAs for inheritance tax planning in the UK may also need to be reconsidered as part of a wider retirement and estate planning strategy. 

Of course, the right answer depends on the individual. But the important point is that pension strategy and estate planning can no longer be considered separately. 

For a fuller explanation, see Upcoming Inheritance Tax Changes: What You Need to Know. 

An overview of IHT planning options 

There is no single magic solution to an IHT liability. Good planning is usually about combining several different strategies in a way that fits your circumstances. Here are the methods that you could use: 

Gifting can gradually reduce the value of your estate. Using annual exemptions, regular gifts from surplus income and carefully planned PETs can all help. The earlier you start, the more time these strategies have to work. 

Our article, How Much Can You Gift Tax-Free in the UK?, explains the different gifting allowances in more detail. 

Trusts can also form part of an estate planning strategy. Depending on the type of trust and the assets involved, they can allow wealth to be moved outside an estate while providing a degree of control over when and how beneficiaries receive it. There are, however, important tax and legal considerations. For more information, see Trust Planning and Inheritance Tax. 

Life insurance written in trust can provide a different kind of solution. Rather than reducing the IHT liability itself, a whole-of-life policy can provide a lump sum to help beneficiaries meet the bill without having to sell property or investments at an inconvenient time. When appropriately structured, the policy proceeds are outside the estate. 

There are also specific reliefs for business and agricultural assets. Qualifying assets may benefit from 50% or 100% IHT relief, subject to the relevant rules and caps applying from April 2026. See our article Business Relief and Inheritance Tax for more detail. 

Finally, charitable giving can have an interesting tax benefit. If you leave at least 10% of your net estate to charity, the rate of IHT on the remainder can fall from 40% to 36%. In some circumstances, this means the amount ultimately saved in IHT can outweigh the value of the additional charitable gift. 

The important thing is not to look at these strategies in isolation. 

A financial planner can model your overall estate, consider how different strategies interact and identify a combination that works for you. And because tax rules change, as the forthcoming pension changes demonstrate, your plan should be reviewed regularly rather than treated as a one-off exercise. 

Conclusion 

Inheritance tax is sometimes described as a voluntary tax: something that can be reduced, legally, by those who plan ahead. 

There is some truth in that. But effective IHT planning isn’t about trying to avoid tax at all costs. It is about understanding your position and making informed decisions about how and when your wealth is passed on. 

The starting point is simple: understand the value of your estate, work out which thresholds and allowances apply and identify the potential IHT liability. 

Then comes the planning. 

Gifting allowances, trusts, life insurance, business and agricultural reliefs, charitable giving and pension strategy can all play a part. The right combination will depend on your circumstances, your priorities and how much control you want to retain over your assets. 

And, as with most areas of financial planning, the earlier you start, the more options you are likely to have.

If you are concerned about the potential IHT liability on your estate, our financial planners can help you understand your exposure and explore the options available to you. Find out more about our Inheritance Tax planning service and get in touch to discuss your circumstances.

Plan now to protect your estate and loved ones. Speak with one of our Planners to minimise inheritance tax and secure your family’s future.

This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. 

The Financial Conduct Authority does not regulate estate planning or tax planning.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.