How to Reduce Your Inheritance Tax: A 2026/27 Planning Guide

Yes. Inheritance tax planning is legitimate when it uses the reliefs and exemptions Parliament created for exactly that purpose. HMRC distinguishes between using the rules (giving within your annual exemption, making gifts and surviving seven years, leaving money to charity, claiming business relief) and contrived schemes designed only to sidestep the tax. The strategies in this guide are the mainstream, well-established ones.

IHT is charged at 40% on the value of your estate above the available tax-free thresholds. The estate includes property, savings, investments and possessions, less debts and reliefs. For 2026/27 the standard nil-rate band is GBP 325,000, frozen at that level until at least April 2030 (the freeze is now legislated to run to April 2031). If you leave at least 10% of the net estate to charity, the rate on the taxable remainder falls to 36%. Transfers between spouses and civil partners who are UK long-term residents are exempt without limit, which is why most planning focuses on passing value to the next generation, not the surviving partner.

The single most important point is timing. The gift rules, trusts and reliefs all reward planning done years ahead of death, so the value of a plan drops sharply if it is left late. Because wills and trust deeds are legal documents, effective planning is usually a partnership between a tax adviser who designs the strategy and a solicitor who drafts the paperwork.

Before giving anything away, make sure both nil-rate bands are fully used. The nil-rate band of GBP 325,000 applies to everyone. On top of it, the residence nil-rate band (RNRB) of GBP 175,000 is available when you pass a home, or the proceeds of one, to direct descendants such as children, stepchildren, adopted children or grandchildren.

Both bands are transferable between spouses and civil partners. Any percentage unused on the first death passes to the survivor, so a couple can combine two nil-rate bands and two residence nil-rate bands. In practice that means a married couple leaving a qualifying home to their children can pass on up to GBP 1 million free of IHT (GBP 325,000 plus GBP 175,000, doubled).

• Watch the RNRB taper. The residence nil-rate band is reduced by GBP 1 for every GBP 2 that the net estate exceeds GBP 2 million. An estate of GBP 2.35 million or more loses the full GBP 175,000 entirely. Keeping the estate below GBP 2 million, often through lifetime gifting, can preserve up to GBP 175,000 (GBP 350,000 for a couple) of allowance.
• Make a will. Without one, the intestacy rules decide who inherits, and you may miss the RNRB or the spouse exemption.
• Review older wills. Nil-rate-band discretionary trusts and other structures written years ago may no longer be the most efficient approach now that bands transfer between spouses.

Once the bands are secured, layer in the smaller annual exemptions, which are simple, immediate and often underused. Each tax year you can give away GBP 3,000 in total (the annual exemption), and any unused annual exemption can be carried forward one year, so a couple who have used neither could give GBP 12,000 in one year. Separately, you can make unlimited small gifts of up to GBP 250 per person (to people who have not received your annual exemption), and wedding or civil-partnership gifts of up to GBP 5,000 to a child, GBP 2,500 to a grandchild or great-grandchild, and GBP 1,000 to anyone else.

Larger gifts are the workhorse of estate planning. A gift to another individual is a potentially exempt transfer (PET). If you survive seven years from the date of the gift, it falls completely outside your estate and no IHT is due on it. If you die within seven years, the gift is brought back into the calculation.

Taper relief softens the blow for gifts made three to seven years before death, but it is widely misunderstood. Taper relief reduces the tax on a gift, not the value of the gift itself, and it only bites once your cumulative gifts in the seven years before death exceed the GBP 325,000 nil-rate band. Gifts are set against the nil-rate band first, so on smaller gifting programmes taper relief may never apply at all.

• Less than 3 years before death: no reduction, full 40% on the taxable amount.
• 3 to 4 years: taper reduces the tax by 20% (an effective 32% rate).
• 4 to 5 years: reduced by 40% (an effective 24% rate).
• 5 to 6 years: reduced by 60% (an effective 16% rate).
• 6 to 7 years: reduced by 80% (an effective 8% rate).
• 7 years or more: the gift is exempt.

A gift only works if it is a genuine gift. If you continue to benefit from what you have given away, for example gifting your house but still living in it rent-free, the gift with reservation of benefit rules can pull the asset back into your estate regardless of the seven years. This is one of the most common traps and one of the clearest reasons to take advice before acting.

The normal expenditure out of income exemption is one of the most powerful and underused reliefs, because gifts that qualify are immediately exempt with no seven-year wait. There is no monetary cap, provided the conditions are met.

• The gifts must form part of a regular pattern, for example a standing order each month or a set annual payment. One-off gifts do not qualify.
• They must be made out of income (salary, pension, dividends, rent), not out of capital or savings.
• After making the gifts, you must be left with enough income to maintain your usual standard of living.

Typical uses include funding grandchildren's school fees, paying premiums on a life policy written in trust, or making regular payments into a family member's savings. The key to defending this exemption is record-keeping. HMRC will want to see, on the IHT403 form after death, that the gifts were habitual and comfortably covered by income. Keeping a simple annual schedule of income, expenditure and gifts, and a note of your intention to make regular gifts, makes the claim far easier for your executors.

Life insurance does not reduce the size of your estate, but it can fund the tax bill so your family does not have to sell the family home or a business to pay HMRC. The essential step is to write the policy in trust. A policy held in trust pays out directly to your chosen beneficiaries, outside your estate, so the payout itself is not taxed and reaches them quickly rather than being frozen while probate is sorted out.

A whole-of-life policy in trust is often used to cover an expected IHT liability, and the premiums can frequently be met using the normal expenditure out of income exemption. For gifts made in the seven years before death, a decreasing-term policy (sometimes called gift inter vivos cover) can be arranged to match the reducing IHT exposure as taper relief takes effect. Putting an existing policy into trust is usually straightforward, but the choice of trust and beneficiaries has consequences, so this is another point to coordinate with your adviser and solicitor.

Three further levers can remove or shelter larger amounts of value, but each involves more moving parts.

Charitable giving. Gifts to UK charities are exempt from IHT, and there is an added incentive: if you leave 10% or more of the net estate to charity, the IHT rate on the rest of the estate falls from 40% to 36%. For estates already planning significant charitable legacies, meeting the 10% threshold can mean the charity receives more while the cost to other beneficiaries is reduced.

Trusts. Putting assets into trust lets you remove value from your estate while keeping a measure of control over who benefits and when, which is valuable for young or vulnerable beneficiaries. Most lifetime trusts fall under the relevant property regime, which carries its own IHT charges: an entry charge of up to 20% on amounts above the nil-rate band when assets go in, a principal (ten-year anniversary) charge of up to 6% of the value of relevant property, and exit charges when assets leave. Importantly, each trust has its own nil-rate band, and no exit charge arises on assets that leave within three months of the trust starting or within three months of a ten-year anniversary. Note also that from 6 April 2025 the excluded property rules for offshore trusts are based on the settlor's long-term UK residence rather than domicile. Trusts are powerful but technical, and they are covered in more depth in our related guide on trusts and inheritance tax.

Business and agricultural relief, with the 2026 reform. Qualifying business property (business relief, BR) and farmland and farm assets (agricultural property relief, APR) can attract relief from IHT, historically at 100%. This is being reformed. From 6 April 2026, 100% relief on business and agricultural property is capped at a combined GBP 2.5 million per person, with 50% relief on qualifying value above that cap (the GBP 2.5 million allowance was confirmed at the Autumn Budget 2025, up from an originally announced GBP 1 million; it is transferable between spouses and civil partners, so a couple can pass up to GBP 5 million of qualifying business or agricultural assets between them, but treat the precise interaction as to confirm for very large or mixed estates and for property held in trust). Separately, shares that are not listed on a recognised stock exchange, such as most AIM-quoted and unlisted shares, drop to 50% relief in all circumstances from 6 April 2026 and do not benefit from the GBP 2.5 million allowance. Owners of trading businesses and farms should revisit succession plans in light of these caps; our related guide on business property relief goes into the detail.

For years, defined-contribution pensions have been an efficient way to pass wealth on, because unused pension funds usually sat outside the estate for IHT. That changes. From 6 April 2027, most unused pension funds and death benefits are brought within the value of the estate for inheritance tax.

HMRC has confirmed the broad shape of the reform. From that date, personal representatives (your executors), rather than pension scheme administrators, become responsible for reporting and paying any IHT due on unused pension funds. Some benefits are outside scope: death-in-service benefits paid from a registered pension scheme, and dependants' scheme pensions from defined benefit or collective money purchase arrangements, are excluded. HMRC estimates that of around 213,000 estates with inheritable pension wealth in 2027/28, roughly 10,500 will face an IHT liability that would not previously have arisen, with a further 38,500 or so paying more than before. Some administrative details remain to confirm as the rules are finalised, so treat the mechanics as provisional.

The practical effect is that the pass-it-on-through-the-pension strategy weakens for larger estates. It may make sense to reconsider the order in which you draw on different assets in retirement, and how pensions sit alongside gifting and other allowances. Equity release and downsizing are related considerations here: releasing equity to fund lifetime gifts, or downsizing, can reduce the estate, and downsizing does not automatically lose the residence nil-rate band because a downsizing addition can preserve it where a home is sold and the value passes to descendants. These are finely balanced decisions with knock-on effects, and are exactly the sort of trade-off that benefits from a joined-up plan.