IHT Planning Checklist UK (2026): 12 Steps to Reduce Your Inheritance Tax Bill Before It Is Too Late

The first three steps are foundational — they cost nothing and can together shelter up to £1 million per couple from IHT: (1) STEP 1 — MAXIMISE THE NRB (£325,000 PER PERSON): the nil-rate band (NRB) is the threshold below which no IHT is charged. Each person has a NRB of £325,000 (fixed until at least April 2030). Gifts in the 7 years before death that were PETs (potentially exempt transfers) or chargeable lifetime transfers use up the NRB first — so the NRB available at death can be reduced by lifetime giving. Strategic lifetime giving should be managed to preserve the NRB for the estate; (2) STEP 2 — TRANSFER UNUSED NRB (TRANSFERABLE NRB — IHTA 1984 s.8A): a married couple or civil partnership can transfer unused NRB from the first death to the survivor's estate. If the first to die leaves everything to the surviving spouse (fully exempt), 100% of the first NRB is unused and transfers. The survivor then has up to 200% NRB — £650,000 in 2026. The claim is made on the death of the survivor (IHT402 form); (3) STEP 3 — RESIDENCE NIL-RATE BAND (RNRB — IHTA 1984 s.8D): the RNRB (£175,000 per person in 2026) applies when a qualifying residence is left to direct descendants (children; step-children; grandchildren; adopted children). Conditions: (a) the deceased owned a qualifying residence at death (or a downsized one — see RNRB downsizing rules); (b) the residence (or proceeds) are left to direct descendants; (c) the RNRB is tapered for estates over £2 million (£1 for every £2 over the threshold — fully tapered out at £2.35m for a single person). The RNRB can also be transferred between spouses (IHTA s.8G) — a couple can combine for up to £350,000 RNRB. Together, a couple can have up to £1 million threshold (£325k + £325k NRB + £175k + £175k RNRB); (4) STEP 4 — SPOUSE EXEMPTION (IHTA 1984 s.18): transfers between spouses or civil partners are completely exempt from IHT — both in lifetime (PETs become exempt; chargeable transfers become exempt) and on death. The exemption is unlimited for spouses who are both UK domiciled. For a non-UK domiciled spouse receiving transfers from a UK domiciled spouse, the exemption is capped at £325,000 (unless the non-dom spouse elects to be treated as UK domiciled). Planning: leaving assets to a surviving spouse defers IHT to the survivor's death but preserves cash flow.

The most powerful way to reduce the chargeable estate over time is making lifetime gifts. Three categories are particularly important: (1) STEP 4 — POTENTIALLY EXEMPT TRANSFERS (PETs — IHTA 1984 s.3A): any gift to an individual (not to a trust) is a PET. A PET is completely IHT-free if the donor survives 7 years from the date of the gift. The donor must genuinely part with the asset — there must be no reservation of benefit. Strategy: start making PETs early; the earlier the gift, the higher the chance of surviving 7 years. Taper relief (IHTA s.7(4)) reduces the IHT on failed PETs (where the donor dies within 7 years) — 0-3 years: 100% IHT; 3-4 years: 80%; 4-5 years: 60%; 5-6 years: 40%; 6-7 years: 20%. The taper applies to the tax, not the NRB consumed. Even if IHT is reduced by taper, the failed PET still uses up the NRB; (2) STEP 5 — ANNUAL EXEMPTION (IHTA 1984 s.19): each person can give away up to £3,000 per tax year completely free of IHT (the annual exemption). The exemption is available immediately — no 7-year wait. It can be carried forward ONE year if unused. Married couples each have their own annual exemption — a couple can give £6,000 per year with no IHT consequences. Additional: small gifts exemption (s.20) — up to £250 to any number of individuals per tax year (cannot combine with annual exemption for the same recipient); wedding gifts (s.22 — parent £5,000; grandparent/remoter £2,500; other person £1,000); (3) STEP 6 — NORMAL EXPENDITURE OUT OF INCOME (IHTA 1984 s.21): this is the most powerful and underused exemption. Gifts from surplus income — income the donor does not need to maintain their standard of living — are completely exempt from IHT with no limit on amount. Conditions: (a) the gifts must be from income, not capital; (b) they must be part of a habitual pattern (regular; not one-off); (c) the donor's standard of living must not be reduced. Evidence on HMRC Form IHT403: schedule of income, expenditure, and gifts for at least the last 3-5 years. Strategy: a person with pension income, rental income, or investment income who does not need all of it for living expenses should set up regular monthly/annual gifts to children or grandchildren — these exit the estate immediately as they are made, with no 7-year rule.

For business owners, farmers, and those with life insurance, these three steps can eliminate or significantly reduce IHT on specific assets: (1) STEP 7 — BUSINESS PROPERTY RELIEF (BPR — IHTA 1984 ss.103-114): BPR provides 100% or 50% relief from IHT on qualifying business assets held for at least 2 years. 100% relief: a business or interest in a business; shares in an unquoted company (including AIM shares — though AIM relief was reformed from April 2026); 50% relief: shares in a quoted company where the transferor had voting control; land/buildings/machinery used in a business. BPR planning: (a) ensure qualifying assets are held for the minimum 2-year period before death; (b) AIM portfolio investments may qualify for BPR — allowing investment growth while maintaining IHT exemption; (c) a business owner's shares in their own company are typically 100% BPR-qualifying; (d) IMPORTANT — FA 2026 reform: from April 2026, BPR was reformed with a £1 million cap applying to some reliefs. Verify current BPR limits with specialist advice; (2) STEP 8 — AGRICULTURAL PROPERTY RELIEF (APR — IHTA 1984 ss.115-124): APR provides 100% or 50% relief on qualifying agricultural property (agricultural land, farmhouses, farm buildings) — the farmhouse must be of character appropriate to the farming activities and occupied for agricultural purposes. APR and BPR can be combined on the same asset where appropriate. The FA 2026 changes also reformed APR — similar £1 million cap considerations apply; (3) STEP 9 — WRITE LIFE INSURANCE IN TRUST: a life insurance policy that pays out on death is included in the policyholder's estate for IHT if not written in trust. If the same policy is placed in a suitable trust (typically a discretionary trust or a flexible life-of-another trust), the proceeds pass OUTSIDE the estate — no IHT. Additionally, the proceeds are paid directly to the trust (and then to beneficiaries) without the need for probate, which can significantly speed up availability of funds to pay any IHT due on the rest of the estate. Cost: writing a policy in trust is free and can be done at any time. The only issue is ensuring the trust remains appropriate as circumstances change.

Two of the most overlooked IHT planning tools are already available to most people: pension nominations and charitable giving: (1) STEP 10 — REVIEW PENSION NOMINATIONS (EXPRESSION OF WISHES): most UK pension funds — defined contribution (DC) pensions; SIPPs; personal pensions — can be passed to nominated beneficiaries outside the estate on death, entirely free of IHT. The pension fund remains outside the taxable estate because it is held by the pension trustees, not by the member. A nomination of beneficiaries (also called an 'expression of wishes') instructs the trustees who to pay death benefits to. Critical points: (a) the nomination is not legally binding on the trustees (who retain discretion) — but trustees almost always follow a well-maintained current nomination; (b) a nomination must be updated: (i) after marriage, divorce, or civil partnership; (ii) after children or grandchildren are born; (iii) if a nominated beneficiary dies; (d) note on FA 2025 pension reform: HMRC announced in Autumn 2024 that from April 2027, inherited pension funds would be brought within the scope of IHT. This was a major change that would significantly affect pension estate planning — the timing and detail of this change should be verified with current professional advice; (2) STEP 11 — CHARITABLE LEGACY (10% CHARITY RATE REDUCTION — IHTA 1984 s.24 AND IHTA 1984 s.7A): (a) charitable legacies are fully exempt from IHT — a gift to a charity in a will reduces the chargeable estate £ for £; (b) the 10% charitable legacy rate reduction: where a deceased leaves at least 10% of their net estate to charity, the IHT rate on the remainder is reduced from 40% to 36%. This means a reasonably sized charitable legacy can: (i) benefit a charity; (ii) reduce IHT on the rest of the estate; (iii) increase the net amount passing to non-charitable beneficiaries (because the tax reduction exceeds the gift in many cases). The calculation requires comparing the 36% rate saving against the cost of the charitable gift — in many estates it is IHT-efficient to increase a charitable legacy to reach the 10% threshold.

All IHT planning is undermined by an outdated or badly drafted will. The final step is ensuring the will reflects and implements the planning: (1) ENSURE THE TRANSFERABLE NRB IS CLAIMED: a will that leaves assets to the surviving spouse is IHT-efficient on the first death (spouse exemption) but must be combined with a mechanism to claim the transferable NRB on the second death. The personal representative of the second estate must make an IHT402 claim — supported by documents from the first estate. These documents must be preserved. Ensure the executor on the second death knows to make the claim; (2) ENSURE THE RNRB IS AVAILABLE: if the estate includes a qualifying residence, the will must leave it (or give a residue including it) to direct descendants. A will that leaves the house to non-qualifying beneficiaries forfeits the RNRB. Where the estate is over £2 million and tapered, downsizing or other restructuring may be needed; (3) CHECK THE WILL REFLECTS CURRENT ASSET STRUCTURE: a will that leaves specific assets that no longer exist (an account closed; a property sold) is partially or wholly ineffective. Review the will whenever significant assets are acquired or disposed of; (4) AVOID ACCIDENTAL LAPSE: named beneficiaries die. Without substitution clauses, gifts lapse. A well-drafted will includes substitution clauses (e.g. 'if X predeceases me, to X's children equally'); (5) INCLUDE A TRUST FOR MINOR CHILDREN: if the beneficiaries include minor children, a trust should hold their share until they reach adulthood (or 25 — to preserve the 18-25 trust favoured IHT treatment under IHTA s.71D). Without a trust, the court (as Chancery or Family Division) controls the minor's share; (6) CONSIDER A DISCRETIONARY WILL TRUST: a discretionary trust (or a trust with a power of appointment) gives trustees flexibility after death to distribute the estate in the most tax-efficient way in light of the tax law at the time — particularly useful where the law may change. The NRB discretionary trust (leaving the NRB to a trust rather than absolutely to the survivor) is less important since transferable NRB was introduced but may still be relevant for large estates; (7) UPDATE AFTER EVERY MAJOR LIFE EVENT: marriage; divorce; new child or grandchild; death of a beneficiary; significant change in assets; change in residence. Marriage revokes an entire will (WA 1837 s.18) — remarriage by a divorced person is a particularly high risk event.