How can careful planning help you safeguard more of your wealth for future generations?
Inheritance Tax (IHT) can significantly affect your estate’s worth. From April to August 2025, HM Revenue & Customs collected £3.7 billion in IHT, which is £0.2 billion more than the same period last year[1]. Although the current rules may seem complicated, there are legitimate and effective ways to reduce the tax your loved ones might have to pay after your death.
How Inheritance Tax works
Under current tax rules, IHT is charged at 40% on the part of your estate exceeding £325,000, known as the nil-rate band. This threshold remains frozen until April 2030. Additionally, there is an extra £175,000 residence nil-rate band for individuals passing their home to direct descendants. Married couples and registered civil partners can combine their allowances, allowing up to £1 million of assets to be transferred tax-free.
If your estate is valued below these combined thresholds, no IHT is payable. However, for larger estates, careful planning can greatly influence the amount of tax ultimately paid.
1. Write a Will
A valid Will is one of the most important tools for IHT planning. It guarantees that your assets are allocated according to your wishes and helps prevent unnecessary tax liabilities. Without one, your estate will be distributed under the laws of intestacy (apart from assets owned jointly as joint tenants, which automatically pass to the surviving owner), which may not reflect your intentions or make full use of available allowances.
2. Leave a gift to charity
Charitable giving can both support causes close to your heart and reduce the IHT payable on your estate. Gifts to registered charities are exempt from IHT. Furthermore, if you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate can decrease from 40% to 36%.
If you are considering a charitable legacy, it’s usually better to specify a percentage of your estate rather than a fixed sum. This helps prevent the gift from becoming excessively large or small if your estate’s value changes before your death.
3. Take out a life insurance policy
Holding a whole-of-life insurance policy in an appropriate trust can provide your beneficiaries with a lump sum to cover IHT liabilities. Placing the policy in trust ensures the payout is outside your estate and not subject to IHT. It also allows faster access to funds, as money held in trust usually does not need probate.
If your policy is not currently held in trust, your insurer can provide a simple form to make this change. However, if you are seriously ill at the time of transferring the policy, the value could still be included as part of your estate if you die within seven years. When placing a policy into trust, the amount treated as a gift is typically the greater of the policy’s surrender value and the total premiums paid to date. If you’re in poor health, a value closer to the expected death benefit may be used instead. Any ongoing premiums are also considered gifts unless they fall under a valid exemption.
4. Make gifts during your lifetime
You can reduce the value of your estate by making gifts during your lifetime. Each tax year, you can gift up to £3,000 without it being added to your estate, and you can carry this allowance forward by one year if it remains unused.
Smaller gifts of up to £250 per recipient per year are also exempt, provided no other larger gift is made to the same recipient. Larger gifts may also avoid IHT if you survive for seven years after giving them.
You can also make regular gifts from your income, as long as these do not affect your standard of living. For example, monthly transfers to children or grandchildren may qualify, provided they are made from surplus income rather than capital.
5. Avoid accessing your pension too soon
Money left in your pension is typically exempt from IHT, making it one of the most tax-efficient assets to pass on to beneficiaries. However, the government intends to include pensions in IHT calculations from April 2027, which could change how retirement wealth is managed.
Until then, leaving pension funds untouched for as long as possible may remain a wise approach. Reviewing your retirement income plan in light of upcoming changes can help ensure you are optimising how and when you access your assets.
6. Get married or enter a registered civil partnership
Marriage or a registered civil partnership can offer significant IHT benefits. Anything left to your spouse or civil partner is exempt from IHT, and any unused allowance can be transferred to them upon your death. This effectively doubles the available threshold for couples, providing up to £1 million of tax-free inheritance if both allowances and residence bands are utilised.
For unmarried couples, the rules are less generous. Transfers between partners are not automatically exempt, and individual allowances cannot be combined. For couples with substantial shared wealth, formalising the relationship can therefore offer significant tax benefits.
Source data:
[1] HMRC tax receipts and National Insurance Contributions for the UK (monthly bulletin) – updated 8 October 2025.
This article is for information purposes only and does not constitute tax, legal or financial advice. Tax treatment depends on individual circumstances and may change in the future. The financial conduct authority does not regulate estate planning or will writing.