What Assets are Exempt From Inheritance Tax?

Trying to understand the rules around inheritance tax is a tough ask. With so many allowances, reliefs and exemptions (that are all subject to change), efficient estate planning is challenging. Yet, knowing what assets are exempt from inheritance tax is more critical than ever given that pensions will come under the IHT net in 2027.

The good news is that there are still a number of allowances and exemptions, even when pensions do move under the IHT net in 2027. And, when leveraged to their full potential, exemptions can make a significant difference to your estate’s final IHT bill. By not using them, or using them poorly, your heirs could end up paying more to HMRC than necessary.

Bearing that in mind, here we explore the main assets that are currently exempt from inheritance tax, how they work and how to reduce inheritance tax as part of your long-term financial plan.

Assets passed to spouses or civil partners

When it comes to IHT, leaving your estate to a spouse or civil partner is arguably one of the most generous IHT exemptions available. As it stands, anything you leave to a UK-domiciled spouse or civil partner is completely exempt from inheritance tax, regardless of value.

However, what if your spouse isn’t UK-domiciled? Well, in that case, the exemption is capped at £325,000. It’s possible for them to elect to become UK domiciled for tax purposes – though that can bring wider implications, as they will then be subject to other UK tax rules. Discussing this decision with a financial adviser is, therefore, a good idea.

Charitable donations and amateur sports clubs

Any donations made to a registered charity or amateur sports clubs are 100% exempt from IHT. While that can be helpful for IHT purposes, did you know that if you give 10% or more of your estate to charity, you can reduce the IHT rate on the rest of your estate to 36%? That’s down from the standard 40%. The overall impact on your estate could be sizeable and something that a financial adviser could help you work through to see if it’s an appropriate option for you.

Gifts made before death

One of the better-known exemptions from IHT and often an effective way of how to reduce inheritance tax is gifting assets to others before you pass away. Under current legislation, if you give away an asset and survive for seven years afterwards, that gift becomes entirely free from inheritance tax. Have you ever mapped out which assets you might be comfortable gifting? Doing so can be helpful, but you also need to remember that if you pass away before seven years, IHT is tapered in these bands:

Other gifts

There are a number of other inheritance tax gifts exemptions that can be an effective way to reduce your IHT bill:

Small gifts

Under the small gifts exemption, you can currently give up to £250 per person per tax year. The entire £250 is automatically free from IHT. However, it can’t be combined with any other allowance from the same person. That said, it can be a valuable and effective way to transfer wealth as part of a broader estate planning strategy.

Annual gifts

Are you making the most of your annual gift allowance? Because you can give away £3,000 per tax year with no inheritance tax implications. Also, if you don’t use your allowance in one year, you can carry it forward into the next, so it can be possible to give away £6,000. This exemption is a simple yet effective way of reducing your IHT.

Regular gifts out of income

Do you have surplus income that could be gifted to loved ones? If you do, and you make regular gifts, they can be immediately exempt from IHT. There are a few rules to qualify so the gifts are exempt:

• Gifts must come from income and not your capital
• Gifts must be regular and sustainable
• Gifts must not reduce your standard of living

Again, this can be a potent tool for reducing your IHT and a way for parents or grandparents to support their offspring or grandchildren during their lifetimes. We can work with you to see if it’s a suitable option for you.

Wedding/civil ceremony gifts

Have you got a family wedding coming up? If yes, you can give one-off gifts for weddings or civil ceremonies, and they’ll be exempt from IHT.

The allowances are:

• £5,000 to a child
• £2,500 to a grandchild
• £1,000 to others

Pension funds

While this is currently under review for change in 2027, most pensions, such as defined contribution or SIPPs, are seen as outside your estate for IHT purposes. This means pension funds can usually be passed to beneficiaries free of IHT, though income tax may apply on withdrawals depending on your age at death.

At the moment, if you pass away before the age of 75, your beneficiaries can inherit your pension and death benefits tax-free. If you pass away after age 75, they will pay income tax on withdrawals, but no IHT.

However, the proposed post-2027 will bring unspent pension pots into the IHT net, so this will change in future.

Trusts

Have you ever considered a trust to help protect your assets for future generations? Many people opt to use a trust-based structure, such as a discounted gift trust inheritance tax planning tool, to reduce the value of their taxable estate. Other options include:

Examples include:

• Bare trusts: A trust where the beneficiary has an immediate and absolute right to both the income and the capital any time after they are 18.
• Interest-in-possession trusts: A trust where a beneficiary is entitled to the income from the trust assets.
• Discretionary trusts: Trustees decide how and when to distribute income or capital to beneficiaries.
• Trusts for vulnerable beneficiaries: A trust which can provide additional tax advantages and protection for beneficiaries who are disabled or otherwise vulnerable.

Trusts can be a particularly complicated part of estate planning and the rules surrounding them can change too. However, when they are used in the right circumstances, they can be an effective answer to how to reduce inheritance tax. Seeking help from a financial professional means you will always receive the most appropriate advice.

Life insurance written in trust

A life insurance policy placed in trust is excluded from your estate, meaning the payout goes directly to beneficiaries without paying IHT. If you already have a life insurance policy, do you know if it’s already written in trust? Because, if it isn’t the payout may be counted as part of your estate, potentially increasing your IHT bill.

Business and agricultural property reliefs

These reliefs are one of the most generous allowances available to you, as you can reduce the taxable value of certain assets by 50% or 100%, if you are a business or land owner:

Business Relief (BR)

Assuming qualifying conditions are met (there is also a limit of £2.5m from 6 April 2026 onwards), the 100% relief applies to:

• Shares in an unlisted trading company
• Sole trader businesses
• Partnership business assets used for trading

The 50% relief applies to:

• Shares controlling more than 50% of a listed company
• Land, buildings or machinery used in the business

To qualify for either, assets must have been owned for at least 2 years before death. Have you reviewed yours recently?

Agricultural Relief (AR)

AR can provide up to 100% relief on farmland, farm buildings and farmhouses used for agricultural purposes (up to a limit of £2.5m from 6^th April 2026 onwards). This will only apply if you’ve owned or farmed the land for 2 years (if occupied) or 7 years (if rented out).

These BR and AR rules are currently under review as part of Rachel Reeves’s 2024 budget.

Bringing it all together

While the UK tax system remains complex, understanding what assets are exempt from inheritance tax is a crucial way to reduce your IHT. But you don’t have to do that alone. We can help you use exemptions effectively, so they add up to making a big difference. By creating a well-structured plan, we can help ensure more of your wealth goes to the people or causes that mean the most to you.

So, if you’d like to explore your options or understand which exemptions apply to your situation, our planners are here to help. Speak to us today for guidance.

You can contact us here.

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