Use the allowances before you give anything away
Inheritance tax is charged at 40% above your tax-free thresholds, so the first job is making sure none of those thresholds is wasted. Everyone has a £325,000 nil-rate band, and the residence nil-rate band adds up to £175,000 where a home, or the proceeds of one, passes to direct descendants. Both bands transfer between spouses and civil partners, which is how a married couple can pass on up to £1 million free of IHT. Watch the taper though: the residence band shrinks by £1 for every £2 the estate exceeds £2 million, so keeping the estate under that ceiling, often through lifetime gifting, protects up to £175,000 of allowance per person. Then layer in the small exemptions: £3,000 a year (with one year's carry-forward), unlimited £250 small gifts, and wedding gifts of up to £5,000 to a child.
Gifting: the seven-year rule and surplus income
Larger gifts are the workhorse. A gift to another individual is a potentially exempt transfer: survive seven years and it leaves your estate entirely. Taper relief between years three and seven reduces the tax on a gift, not its value, and only applies once your cumulative gifts exceed the £325,000 nil-rate band, so on smaller programmes it may never bite. Two traps matter. A gift you keep benefiting from, such as giving away your house but living in it rent-free, can be pulled back into the estate under the reservation of benefit rules. And the most underused relief of all, the normal expenditure out of income exemption, makes regular gifts from surplus income immediately exempt with no cap, provided you keep records showing the pattern and that your lifestyle was unaffected.
Charity, reliefs and the 2026/2027 reforms
Leaving 10% or more of the net estate to charity drops the rate on the taxable remainder from 40% to 36%. Business and agricultural relief can still remove qualifying trading and farming value, but from 6 April 2026 the 100% rate is capped at a combined £2.5 million per person, with 50% relief above that. And from 6 April 2027 most unused pension funds are brought inside the estate, which weakens the long-standing strategy of preserving the pension as an IHT-free inheritance. Trusts and life cover written in trust round out the toolkit. These levers interact, and estate planning is where getting the sequence right matters most. Horizon builds joined-up IHT plans on fixed fees agreed upfront, and a free clarity call at /book is the easiest place to start.