IHT Planning Strategies UK: 12 Legal Ways to Reduce Inheritance Tax in 2026
All twelve legal strategies to reduce inheritance tax in England and Wales — from annual exemptions (immediate, no wait) to PETs (7-year clock), normal expenditure from income (no cap), the RNRB (£175,000 on the family home), life insurance in trust, and deed of variation post-death.
The 12 Strategies
Use the annual exemption every year
£3,000 per donor per tax year — immediately exempt, no 7-year wait.
Every individual can give £3,000 per tax year free of IHT under s19 IHTA 1984 — with no 7-year survival requirement. Unused exemption can be carried forward one year only. A couple can give £6,000 per year, or £12,000 in year one if neither used their exemption the previous year. Over 10 years, a couple can pass £60,000 to family members entirely free of IHT using annual exemptions alone — with no survival risk. Additional small gifts of up to £250 per recipient per year (s20 IHTA 1984) are also exempt. Annual exemptions are use-it-or-lose-it (except the one-year carry-forward) — do not delay.
Make Potentially Exempt Transfers (PETs) — start the 7-year clock
Gifts to individuals are immediately exempt if you survive 7 years. Taper relief applies from year 3.
Any gift to an individual (child, grandchild, friend) is a PET under s3A IHTA 1984. If you survive 7 years, it is fully exempt — regardless of amount. If you die within 7 years, the gift is a 'failed PET' and IHT may apply — but taper relief reduces the charge by 20% per year between years 3 and 7 (so death at year 4 = 40% of full charge; year 6 = 20%). The key rule: start the clock as early as possible. A gift made today that fails in year 6 still saves 80% of the IHT that would have been paid. Never delay starting a PET — every year of delay is a year lost from the clock. Document all gifts carefully: date, amount, recipient, and whether any exemptions were used.
Normal expenditure from income — no cap
Regular gifts from surplus income (pension, annuity) are immediately exempt under s21 IHTA 1984.
If you have income that exceeds your living expenses, regular gifts from the surplus are immediately exempt — with no annual cap. Requirements: (1) the gifts must come from income, not capital; (2) they must be habitual (a regular pattern, not a one-off); (3) your standard of living must not be reduced. This is the most powerful and under-used exemption for retirees with pension or annuity income they don't need. A retired couple with combined pension income of £80,000 and living expenses of £50,000 can give away £30,000 per year — immediately exempt, no 7-year wait. Keep records: bank statements showing income source, gift schedule, income/expenditure summary. Evidence goes on IHT403 when the estate is administered.
The spousal exemption — defer IHT, not save it
Unlimited IHT exemption on gifts between UK-domiciled spouses and civil partners (s18 IHTA 1984). No 7-year clock.
Transfers between UK-domiciled spouses and civil partners are immediately exempt — no limit, no 7-year clock. This defers IHT to the second death, with both nil rate bands available via the transferable NRB. But leaving everything to the spouse is not always optimal for very large estates: it concentrates wealth in the survivor's estate. For large estates, consider first-death NRB planning (leaving the NRB amount to a discretionary trust rather than the spouse) — this keeps the NRB value out of the survivor's estate entirely, rather than merely preserving the entitlement for later. Estate equalisation — ensuring both spouses have roughly equal estates — ensures both NRBs and RNRBs are maximised.
Optimise the Residence Nil Rate Band (RNRB)
Up to £175,000 per person (£350,000 per couple) on the family home passed to direct descendants.
The RNRB is only available where the main home (or a downsize equivalent) passes to direct descendants — children, grandchildren, step-children — either directly under the will or via a qualifying interest in possession trust. It does not apply to discretionary trusts. For a couple, both RNRBs are available on second death — £350,000 combined — even if the home passed to the surviving spouse on first death (the transferable RNRB preserves it). Where the estate exceeds £2m, the RNRB tapers away. Ensure wills direct the main home (or a share of it) to direct descendants. Jointly owned property held as joint tenants passes to the survivor automatically — this may prevent direct transmission to children. Consider severing the joint tenancy and owning as tenants in common.
Leave at least 10% to charity — trigger the 36% rate
Schedule 1A IHTA 1984: if ≥10% of net estate (above NRB) goes to charity, IHT rate drops from 40% to 36%.
The 4% rate reduction applies to the entire chargeable estate — not just the charitable portion. In many estates, the IHT saving from the 36% rate exceeds the cost of the extra charitable giving required to hit the 10% threshold. Example: £400,000 chargeable estate. 10% = £40,000 charity. IHT at 36% = £144,000 vs 40% = £160,000. Saving = £16,000 per estate. If the testator was planning to give £30,000 to charity anyway, increasing to £40,000 costs only £10,000 more but saves £16,000 in IHT — the family benefits by £6,000 and the charity gets £10,000 more. This is the 'tipping point' calculation — worth running for every estate with a charitable intent.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
100% relief on qualifying trading businesses and agricultural property. From April 2026: £1m combined cap.
Qualifying trading businesses, unquoted shares, sole trader/partnership interests, and agricultural land/buildings attract 100% BPR or APR — zero IHT. This is the most powerful IHT relief available. From 6 April 2026, a £1 million combined cap on 100% relief means assets above £1m are only 50% relieved (effective 20% IHT). Planning before the cap: each spouse has a separate £1m cap — consider transferring business/farm assets to both spouses to double the £2m combined allowance. The trading test must be met (s105(3) IHTA 1984 — business must be 'wholly or mainly' trading, not investment). AIM shares qualified at 50% historically but are now within the £1m cap for 100% relief.
Life insurance in trust — fund the IHT bill
Whole-of-life policy written in discretionary trust pays out outside the estate — no IHT, no probate wait.
A whole-of-life policy in discretionary trust does not reduce the IHT bill but funds the payment of it. The payout goes directly to the trust beneficiaries on death — outside the estate, no IHT, available immediately without waiting for probate. This means the family does not need to sell the house or business assets to pay the IHT before probate. Premiums paid from income may qualify as normal expenditure from income (further reducing the estate). The policy sum should equal the estimated IHT bill — reviewed regularly as the estate value changes. Premiums are reasonable for policies taken at 55–70; above 75 they can be expensive. The trust must be discretionary (not bare) to keep the policy outside the estate.
NRB discretionary trust in first-death will
First spouse leaves NRB amount (£325,000) to a discretionary trust — prevents it accumulating in survivor's estate.
Post-TNRB (transferable NRB, introduced 2007), the NRB generally transfers anyway. But a first-death NRB trust still has uses: (1) it removes the NRB value from the survivor's estate entirely — protecting against care fee means-testing, remarriage, estate growth; (2) it provides flexibility through trust distributions during the survivor's lifetime; (3) it is useful in second marriages where the first marriage's children's interests need protecting without the assets passing through the step-parent's estate. The trust assets are outside the survivor's estate for 10-year periodic IHT charges only if they meet the relevant property regime conditions. Get specialist advice — NRB trusts are less commonly needed post-TNRB but still valuable in the right estate.
Deed of variation — restructure inheritances within 2 years of death
Section 142 IHTA 1984: redirect inherited assets within 2 years with IHT/CGT treating the variation as if made by the deceased.
A deed of variation allows beneficiaries to redirect inherited assets after death — within 2 years — with IHT and CGT treating the new destination as if the deceased had made it directly. Common uses: redirect to charity to trigger the 36% rate; pass assets from children to grandchildren (generation-skipping); redirect assets between spouses to equalise estates; claim the spousal exemption on assets that passed outside the will. All affected parties (and the executors if IHT is affected) must consent. The beneficiary giving up their inheritance pays no IHT on the variation — it is treated as if they never received the asset. Time limit: 2 years from death (strictly applied — no extension). Often the most powerful tool available after death with no prior planning.
Review pension nominations before April 2027
Unspent pension funds are outside the IHT estate until 6 April 2027 — after that, they are included.
Pension death benefits (flexi-access drawdown, uncrystallised funds) currently pass completely outside the IHT estate — nominated beneficiaries receive them direct with no IHT and no probate. From 6 April 2027, Budget 2024 proposals bring unspent pension funds within the IHT estate — potentially adding hundreds of thousands to the taxable estate. Actions before April 2027: (1) Review and update pension nomination forms — outdated nominations to deceased individuals mean the fund falls into the estate; (2) Consider drawing down pension funds and gifting as PETs to start the 7-year clock; (3) Model the post-2027 estate including pension to understand total IHT exposure; (4) Review whether spending pension funds now (on lifestyle or gifts) is preferable to leaving them subject to IHT from 2027. This change is the single most significant upcoming IHT development.
Make LPAs before capacity is lost
An LPA must be made while you have mental capacity — once lost, the ability to plan lifetime gifts is severely restricted.
This is not a direct IHT saving — but it enables all the others. Attorneys acting under a property and financial affairs LPA can make limited customary gifts (s12 Mental Capacity Act 2005) but cannot make substantial IHT planning gifts without Court of Protection approval. If a person loses capacity without an LPA in place, the Court of Protection must appoint a deputy — taking months, costing thousands, and giving less flexibility. All major IHT gifts (PETs, normal expenditure from income, trust transfers) must be made while the donor has capacity. An LPA made at 65–70, while clearly capable, enables lifetime IHT planning to continue for as long as the person has capacity — and ensures an attorney is ready if capacity is lost.
Frequently Asked Questions
What is the most effective way to reduce inheritance tax in the UK?
The most effective immediate steps are: (1) Use annual exemptions every year (£3,000/person — no wait); (2) Start PETs — the 7-year clock must be started; (3) Use normal expenditure from income if you have surplus pension income — no cap; (4) Ensure wills direct the family home to direct descendants to preserve the RNRB (£175,000). For larger estates: life insurance in trust funds the IHT bill; BPR/APR eliminates IHT on qualifying business and farm assets; deed of variation can restructure inherited estates within 2 years of death.
How much can I give away tax-free each year for IHT?
£3,000 per year as the annual exemption (s19 IHTA 1984) — plus one year's carry-forward if unused. An additional £250 per recipient per year as small gifts (s20). Marriage gifts up to £5,000 (parent), £2,500 (grandparent), £1,000 (others). Normal expenditure from income: no cap — gifts from surplus income that are habitual and don't reduce your living standard are immediately exempt (s21). In total, a couple can often give £20,000–£30,000+ per year free of IHT, depending on income levels.
Is it legal to avoid inheritance tax?
Yes — using HMRC-recognised reliefs, exemptions, and allowances is entirely legal and encouraged by Parliament. Annual exemptions, PETs, spousal exemption, BPR, APR, normal expenditure from income, the charitable 36% rate, and the RNRB are all statutory provisions designed to reduce or eliminate IHT in qualifying circumstances. The distinction is between legal tax planning (using statutory provisions correctly) and illegal tax evasion (concealing assets or misrepresenting valuations). HMRC also challenges artificial avoidance schemes — the GWR rules and POAT rules exist to counter schemes where the donor retains benefit.
When is it too late to do inheritance tax planning?
It is never too late to start, but some strategies require time: PETs need 7 years (though taper relief applies from year 3). Normal expenditure from income and annual exemptions work immediately at any age. Deeds of variation are available for 2 years after death — so planning can happen after death too. The most important action at any age: make an LPA now, while you have capacity — because without it, all lifetime gifting strategies stop when capacity is lost.
Does giving money away to children reduce IHT?
Yes, if you survive 7 years from the date of each gift (PET rules). The gift leaves your estate on the date it is made — and if you survive 7 years, it is fully exempt. Even if you die earlier, taper relief reduces the IHT charge by 20% per year from year 3. Annual exemptions (£3,000/year) can be used for children's gifts — immediately exempt with no 7-year wait. Giving money to children is one of the most straightforward IHT planning strategies available.
Start With the Foundation: a Well-Drafted Will
Every IHT planning strategy depends on a will that uses both nil rate bands correctly, directs the home to direct descendants for the RNRB, and gives executors the flexibility they need. WillSafe will kits for England and Wales guide you through the key decisions.
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