How to reduce your Inheritance Tax bill

Inheritance Tax used to only be of concern to the wealthy. Frozen thresholds, decades of rising house prices, and a major change coming in 2027 mean it now reaches far more ordinary families. However, with a bit of planning, much of it is avoidable. Here's how it works in 2026/27 and the ways you can reduce the bill.

Do I need to worry about Inheritance Tax?

Before getting into the details, it's worth working out whether Inheritance Tax is likely to affect you at all. For many people, the answer is simply no.

In the 2026/27 tax year, the standard nil-rate band is £325,000 per person. On top of that, you may be entitled to a residence nil-rate band of up to £175,000 if you leave a qualifying home to direct descendants such as children or grandchildren. That means an individual could potentially have up to £500,000 of allowances, and a qualifying married couple or civil partners could potentially have up to £1 million if unused allowances can be transferred between them.

A quick check

Start by adding up the approximate value of everything you own — your main home, other properties, bank and savings accounts, ISAs, investments, Premium Bonds, valuable possessions, business interests and, from 6 April 2027, relevant pension funds and death benefits. Then subtract debts that would normally be deductible, such as a mortgage. Don't worry about getting the figure exactly right at this stage — we're simply trying to establish whether IHT is something you need to think about.

If you're single and your estate is comfortably below £325,000, IHT is unlikely to be a concern based on current thresholds. If your estate is between £325,000 and £500,000, don't assume you'll have a bill — the residence nil-rate band could take the total that passes free of IHT up to £500,000 if a qualifying home goes to direct descendants. If you're married or in a civil partnership, unused allowances can normally be transferred to the survivor on first death, so a qualifying couple could have up to £1 million of allowances available on the second death.

If your estate is above these figures, IHT planning becomes more relevant — but even then you may not actually have to pay. The final calculation can be affected by gifts you've made during your lifetime, whether your home qualifies for the residence nil-rate band, whether you're married or in a civil partnership, charitable gifts, business or agricultural reliefs, debts and other allowable deductions, the value and type of your pension arrangements, and other exemptions and reliefs. But if your estate is comfortably above the available allowances, it's worth understanding the rules and considering whether there are sensible steps you can take.

How Inheritance Tax works in 2026/27

Inheritance Tax (IHT) is charged at 40% on the part of your estate above your tax-free allowances. Everyone has a nil-rate band of £325,000 — the slice taxed at 0%. On top of that, the residence nil-rate band adds up to £175,000 when your main home passes to direct descendants (children, grandchildren, stepchildren). Both have been frozen since 2009 and 2017 respectively, and are now frozen until April 2031 — which is why more estates drift into the net each year as asset values rise.

For married couples and civil partners the picture is better. Anything you leave to each other is completely exempt, and the survivor inherits the unused allowances — so a couple can pass on up to £1 million tax-free (two nil-rate bands plus two residence bands) when a home goes to their children. Be aware that the residence band is tapered away for larger estates, losing £1 for every £2 above £2 million. And if you leave 10% or more of your estate to charity, the rate on the rest drops from 40% to 36%.

Are unmarried couples protected?

Many people assume that because they've lived with a partner for a long time, everything passes tax-free between them. That's not correct — the spouse and civil partner exemption does not apply to unmarried partners, regardless of how long you've been together. If you live with a partner but are not married or in a civil partnership, this can have a major impact on IHT and your estate planning should be reviewed carefully. Depending on your circumstances, a marriage or civil partnership, mutual wills, or life insurance held in trust may be worth considering — this is one where getting professional advice makes a real difference.

The big change: pensions and IHT from April 2027

Right now, most unused pension pots sit outside your estate — which is why "spend your other savings first and leave the pension untouched" has long been sound advice for passing wealth on. From 6 April 2027 that reverses: most unused defined contribution pension funds and death benefits will be counted as part of your estate for IHT (with some exclusions, such as death-in-service benefits). For many families this is what tips them over the nil-rate band for the first time.

Start with a will

None of the allowances below work properly without a valid will. If you die without one, the intestacy rules decide who inherits — which may not match your wishes, and can quietly waste the exemptions that keep IHT down, such as leaving assets to your spouse or securing the residence allowance by passing your home to your children. A will is the foundation that lets you direct your estate deliberately.

Everyday gifting allowances

Some gifts leave your estate immediately, with no need to survive any length of time. For example, each tax year you can give away £3,000 in total under the annual exemption (and carry forward one unused year, for up to £6,000). Separately, you can give £250 to any number of different people. And on the occasion of a wedding or civil partnership you can give £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else. Modest amounts, but used consistently across a family they add up.

The most underused exemption: gifts from surplus income

Gifts from surplus income are often overlooked. If you make regular gifts out of your income — not your capital — AND you can still comfortably maintain your own standard of living, those gifts are exempt from IHT, with no upper limit. For example, regularly helping a grandchild with rent, or funding a savings plan for them from your pension income. The conditions are that the gifts form a habitual pattern, come from income rather than savings, and don't dent your lifestyle. HMRC will want evidence, so keep a simple written record of what you gave, when, and from which income.

The 7-year rule and taper relief

Larger one-off gifts to people are "potentially exempt transfers": give one, survive seven years, and it falls out of your estate entirely. Die within seven years and it's added back. This is why gifting earlier in retirement, while you're in good health, is so much more effective than leaving it late.

Leave your home to your children

The residence nil-rate band is worth up to £175,000 each — but only if your main home passes to direct descendants. It's easy to lose by accident: putting the house into trusts, or having no qualifying descendants, can forfeit it. If your estate might rely on this allowance, it's worth checking your will actually secures it. You can find out more on this subject at gov.uk

Downsizing and the residence nil-rate band

Many retirees sell a large family home to move somewhere smaller and assume they've lost the residence nil-rate band. That's not necessarily true. If you downsized — or sold up entirely — on or after 8 July 2015 (the date the residence nil-rate band was first announced), special downsizing rules can preserve the allowance. In broad terms, the property you disposed of would need to have qualified for the residence nil-rate band had you kept it, and assets of at least equivalent value must pass to direct descendants on your death. The assets don't have to be the sale proceeds themselves — they can be cash, savings, investments, or another property. The calculation is fiddly, so if you've moved to a smaller home, into rented accommodation, or into care, it's worth checking your position with a solicitor or estate-planning adviser when your will is being drawn up.

Should I give my house away?

Giving your home away can have unexpected consequences. Although it may appear to remove the property from your estate, you'd need to think about whether you survive seven years, whether you continue living there (which brings HMRC's "gift with reservation of benefit" rules into play — meaning the house may still be treated as yours for IHT), possible Capital Gains Tax issues, Stamp Duty implications, care-fee deprivation-of-assets rules, and loss of control over the property. Giving away a home is one of the areas where professional advice is particularly important — the strategy that seems obvious rarely works the way people expect.

Who pays IHT?

Inheritance Tax is normally paid by the executors or administrators of the estate from estate funds before assets are distributed to the beneficiaries. If there isn't enough cash available in the estate — because most of it is tied up in property, for example — beneficiaries may need to think about how the tax will actually be funded, which is one of the things the next section addresses.

Cover the bill with life insurance in trust

If some liability is unavoidable, one option is to insure against it rather than reduce it. A whole-of-life policy written in trust pays out to your beneficiaries outside your estate — so the payout itself isn't taxed — giving them a ready cash sum to settle the IHT bill without having to sell the family home or investments in a hurry. It doesn't reduce the tax, it just makes it easier to pay. The premiums can often be met from your annual gift allowance or surplus income. Getting the trust right is important so it's best set up with professional advice.

Charity, and when to take advice

Gifts to registered charities are entirely exempt, and leaving 10% or more of your net estate to charity cuts the rate on the remainder from 40% to 36% — so a charitable legacy can cost your other beneficiaries far less than its headline value. Beyond that, trusts can remove assets from your estate, but the rules are genuinely complex, carry their own tax charges, and are easy to get wrong. That's firmly a professional-advice area — as, increasingly, is the whole subject given the 2026 business-relief changes and the 2027 pension change.

Or simply spend and enjoy it

Quite simply, money you spend and enjoy isn't in your estate to be taxed. There's little sense in living frugally into your 80s only for 40% of what's left to go to HMRC. If your future is secure and your estate is comfortably provided for, a newer car, the trips you've put off, or helping family while you're here to see it can be the most rewarding "IHT plan" there is. The trick is knowing how long your money will last, so you can spend without worry. That's what our Drawdown Tool is for: it shows how long your pot lasts, so you can enjoy it rather than hoarding it.

Putting it together

Most IHT planning is about using allowances deliberately rather than by accident: leaving assets to a spouse, securing the residence band, gifting early and regularly, and — from 2027 — rethinking where your pension fits. The Inheritance Tax Planner estimates your position against the current thresholds, applies the residence band and its £2 million taper, and lets you see how gifting changes the bill.