As later life approaches, one of the main questions people ask themselves is ‘how to avoid inheritance tax’. Inheritance tax (IHT) affects more families every year, and recent changes make proactive estate planning more important than ever. In this guide, we explain the most effective, legally recognised strategies to reduce or avoid IHT and protect your estate for the people you love.
*Important: Recent Budget Changes Affecting IHT
The Autumn Budget 2025 (26 November 2025) confirmed significant changes to inheritance tax rules. IHT thresholds are now frozen until April 2031, pension funds will be brought into estates from April 2027, and Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped at £2.5 million for full relief from April 2026. Early professional advice is now more critical than ever.
What is Inheritance Tax – and Why Does it Matter Now?
Inheritance tax is a tax charged on the estate (property, money, and possessions) of a person who has died. In the UK, IHT is levied at a rate of 40% on the portion of an estate that exceeds the applicable tax-free thresholds. At first glance, it may seem like a tax affecting only the wealthiest, but rising property prices with frozen thresholds mean that hundreds of thousands of ordinary families are now caught within its reach.
HMRC collected £9 billion in IHT receipts in 2025/26 alone – and the Office for Budget Responsibility forecasts this will rise to £14.5 billion by 2030/31, driven by frozen thresholds, increasing property values, and new rules that will bring pension assets into scope from 2027. If you own a home, have retirement savings, or have accumulated assets over a working lifetime, the question of how to avoid or reduce inheritance tax is more pressing now than at any point in recent history.
The encouraging reality is that UK law provides numerous legitimate, HMRC-approved ways to reduce your inheritance tax liability – often significantly, and in some cases, can help you avoid inheritance tax altogether. The key to this is taking action early, with expert guidance on inheritance tax planning.
Understanding IHT Thresholds and Allowances
Before exploring strategies to avoid inheritance tax, it is important to understand the allowances currently available to you. Every individual has a combination of tax-free thresholds that can shelter part, or all of their estate from IHT.
NIL-RATE BAND
£325,000
Frozen until April 2031
RESIDENCE NIL-RATE BAND
£175,000
When passing a home to direct descendants
COMBINED PER PERSON
£500,000
Up to £1 million for couples
The nil-rate band (NRB) is the standard threshold below which no IHT is payable. It has been set at £325,000 since 2009 and will remain frozen at this level until April 2031 – meaning more estates are pulled into the IHT net each year purely through asset price inflation.
The residence nil-rate band (RNRB) provides an additional allowance of £175,000 when a family home is passed to a direct descendant (children, stepchildren, grandchildren, etc.). This is tapered away for estates worth more than £2 million at a rate of £1 for every £2 over the threshold.
Crucially, any unused NRB or RNRB can be transferred to a surviving spouse or civil partner on death — meaning a married couple or civil partnership can potentially shelter up to £1 million from IHT altogether. This makes estate planning for couples particularly important and effective.
Any assets passing between spouses or civil partners are completely exempt from IHT, regardless of value. This spousal exemption is one of the most powerful tools in estate planning.
7 Effective Strategies to Avoid or Reduce Your Inheritance Tax Bill
There is no single “best” approach to reducing your IHT liability – the right strategy depends on your circumstances, your assets, and your wishes for the people you leave behind. However, the following are the most widely used and effective methods available under current UK law.
1. Make the Most of Your Nil-Rate Bands
The first step in any IHT planning exercise is to ensure you are fully using the allowances already available to you. This means structuring your Wills so that both the standard nil-rate band (£325,000) and the residence nil-rate band (£175,000) are used efficiently — especially if you are married or in a civil partnership. Many couples inadvertently allow allowances to be wasted on the first death. A properly drafted Will, reviewed by an experienced solicitor, can prevent this.
2. Make Lifetime Gifts
One of the most practical ways to reduce inheritance tax is to begin transferring wealth during your lifetime. Assets given away more than seven years before death are generally removed from your estate entirely. Even before the seven years are up, a tapering relief reduces the IHT due. There are also annual exemptions and smaller gift allowances that remove assets from your estate immediately – with no seven-year rule at all. We explain these in full in the gifting section below.
3. Place Assets in Trust
Trusts are a well-established, HMRC-approved mechanism for placing assets outside of your estate while retaining a degree of control over who benefits and when. Used correctly, trusts can significantly reduce or eliminate the IHT payable on specific assets. Common trust types used in IHT planning include discretionary trusts, loan trusts, and discounted gift trusts. Trust planning requires careful legal drafting and professional advice, but the tax savings can be considerable.
4. Write a Life Insurance Policy in Trust
A life insurance policy can be an effective way to cover a potential IHT liability – but only if it is placed in trust. If a life insurance policy is not held in trust, the pay-out on death forms part of your estate and is itself subject to IHT, potentially making the problem worse. When the policy is written in trust, the proceeds pass directly to your named beneficiaries outside of your estate, free from IHT, and are typically paid more quickly as they do not have to go through probate.
5. Claim Business Property Relief (BPR) and Agricultural Property Relief (APR)
If you own a qualifying business, business shares, or agricultural property, you may be eligible for relief that substantially reduces – or eliminates – IHT on those assets. From April 2026, the first £2.5 million of qualifying business and agricultural property will continue to attract 100% relief from IHT. Property above that threshold will attract 50% relief. Crucially, the £1 million allowance will now be transferable between spouses and civil partners on death – an important change confirmed in the Autumn 2025 Budget. Business owners should review their position now in light of these reforms.
6. Leave Money to Charity
Any gifts left to UK-registered charities in your Will are completely exempt from IHT. Furthermore, if you leave at least 10% of your “net estate” (the estate remaining after deducting allowances) to charity, the IHT rate on the remainder of your estate is reduced from 40% to 36%. This can represent a meaningful saving and a lasting legacy.
7. Review Your Pension Arrangements
Historically, pension funds passed outside of a person’s estate for IHT purposes – making pensions one of the most effective estate planning tools available. However, from April 2027, most unused pension funds and death benefits will be brought into the estate for IHT purposes. This is one of the most significant changes to IHT in a generation and will affect a very large number of families. Reviewing your pension, and potentially your broader estate plan, before April 2027 is strongly recommended.
How Gifting Can Help Reduce Inheritance Tax
Gifting is one of the most accessible and flexible strategies available to reduce your IHT liability. The rules can seem complicated, but the key exemptions are straightforward once understood:
The gifts from surplus income exemption is often overlooked but can be highly valuable, particularly for those with pension income or investment income that exceeds their normal living expenditure. To qualify, gifts must be made from income (not capital), they must be regular and habitual, and they must not affect your standard of living. Proper record-keeping is essential to establish this exemption.
The Seven-Year Rule for Larger Gifts
Larger gifts – known as potentially exempt transfers (PETs) – fall outside your estate entirely if you survive for seven years after making them. If you die within seven years, the gift may still attract IHT, but the rate tapers down the longer you survive after making it:
Years 0 – 3
40% IHT
Full inheritance tax rate applies if you die within three years of making the gift
Years 3 – 4
32% IHT
Taper relief reduces the effective rate to 32%
Years 4 – 5
24% IHT
Rate reduces further to 24%
Years 5 – 6
16% IHT
Only 16% IHT applies if death occurs in this window
Years 6 – 7
8% IHT
Approaching full exemption – rate is reduced to 8%.
After 7 Years
0% IHT – Fully Exempt
The gift falls completely outside your estate with no IHT liability
This is why starting to gift early is so important. The sooner you begin, the sooner the seven-year clock starts – and the greater the potential tax saving for your family.
Using Trusts to Protect Your Estate from Inheritance Tax
Trusts are legal arrangements that allow you to place assets (such as property, investments, or cash) under the management of trustees for the benefit of beneficiaries you have chosen. When assets are placed in trust, they may no longer form part of your estate for IHT purposes, depending on the type of trust and when the transfer was made.
Trust planning is complex and must be approached carefully to ensure the desired tax treatment is achieved. At Jones Whyte, our trust planning specialists work closely with clients to identify the most appropriate structure for their needs. Common options include:
- Discretionary Trusts - offering maximum flexibility for trustees to decide how and when assets are distributed to beneficiaries.
- Loan Trusts - allowing you to retain access to a loan while the investment growth occurs outside your estate.
- Discounted Gift Trusts - enabling you to make an immediate gift while retaining a right to regular payments for your lifetime.
- Interest in Possesion Trusts - allowing a beneficiary (such as a surviving spouse) to benefit from an asset during their lifetime, with the asset passing to others thereafter.
Importantly, following changes that took effect from 26 November 2025, where trust assets are moved from the UK to non-UK jurisdictions where the settlor has ceased to be a long-term UK resident, an IHT exit charge may now apply. Advice on trust structures should always be sought from a qualified solicitor with up-to-date knowledge of the current rules.
Pensions and Inheritance Tax: The Critical 2027 Changes
Major Change Coming – Action Required Before April 2027
From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate for inheritance tax purposes. This represents one of the biggest shifts in IHT planning in decades and will affect a significant number of people who currently use pension savings as part of their estate planning strategy.
Until April 2027, pension funds that remain unspent at death generally pass outside of your estate and are not subject to IHT. This has made pension saving a powerful estate planning tool for many families – a pot that can be passed to loved ones with no IHT liability.
From April 2027, this changes. Personal representatives (executors) will be responsible for reporting and paying any IHT due on unused pension funds and pension death benefits. There is an exception: death-in-service benefits paid from a registered pension scheme will continue to be excluded from the estate.
The practical implications of this change are substantial. Anyone who has included their pension in their estate planning strategy will need to revisit that plan. Options worth considering in advance of the change include:
- Reviewing the level of pension savings and whether drawdown strategies should be adjusted.
- Updating nomination of beneficiary forms with pension providers.
- Reviewing life insurance arrangements and whether policies should be written in trust to offset any IHT liability.
- Reassessing the overall structure of your estate plan in light of the changed landscape.
Acting before April 2027 gives you the most options. The team at Jones Whyte can help you understand exactly how these changes will affect your position and what steps are available to you.
The Importance of an Up to Date Will
A valid, up-to-date Will is the cornerstone of any effective estate plan. Without one, your estate will be distributed according to the rules of intestacy – which may result in assets passing to people you would not have chosen, allowances being wasted, and a far greater IHT liability than necessary.
Even if you have an existing Will, it may need to be reviewed and updated if:
- Your personal circumstances have changed (marriage, divorce, new children or grandchildren, bereavement).
- The value of your estate has changed significantly.
- You have not reviewed your Will since the recent changes to IHT rules following the 2024 and 2025 Budgets.
- Your Will does not make full use of available allowances, including the residence nil-rate band.
- You wish to include charitable gifts or to structure gifts to beneficiaries in a more tax-efficient way.
Wills can also work in conjunction with trusts, Powers of Attorney (POA), and other estate planning tools to provide a comprehensive framework for protecting your assets and wishes. At Jones Whyte, we offer a full estate planning service – from straightforward Wills to complex trust arrangements – designed to meet your individual needs.
Ready to Protect Your Estate?
Our specialist estate planning solicitors can review your position, explain your options, and help you build a plan tailored to your circumstances – before the rules change further.
Please note: This article is for general information purposes only and does not constitute legal advice. It should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you need advice on a legal matter, get in touch with our team.
