You've worked hard, saved carefully, and built something worth passing on. Understandably, you want your loved ones to benefit fully from your efforts. But with inheritance tax (IHT) thresholds frozen until 2030, more families could find themselves facing a larger tax bill than expected.
The good news? With a bit of planning, you can take steps now to reduce your IHT bill—and leave more behind for the people who matter most.
Will Inheritance Tax Affect You?
In many cases, people can pass on assets without paying inheritance tax. At the moment:
- Married couples or civil partners can pass on up to £1 million tax-free if they own a home and leave it to direct descendants
However, if your estate is worth more than these thresholds, IHT may apply at a rate of 40% on anything above that amount. Once your estate exceeds £2 million, the extra allowance for passing on your home begins to reduce—and disappears altogether at £2.7 million.
To check current thresholds and rates, visit the UK government’s inheritance tax guide: https://www.gov.uk/inheritance-tax
Ways to Reduce Your Inheritance Tax Bill
There’s no one-size-fits-all answer, and it’s important to get advice based on your personal situation. But here are a few options that could help.
Gifting to Loved Ones
You can give away:
- £3,000 each year without it being taxed
- Unlimited small gifts of up to £250 per person
- Any amount to your spouse or civil partner (if they live in the UK)
Larger gifts can also be made but fall under the seven-year rule. This means if you live for seven years after giving, the gift is usually tax-free. If you pass away sooner, the gift may be taxed, but the rate tapers down the longer you live. It is important to note that gifts over the "gift allowances" do not increase your inheritance tax liability but have the potential to reduce it if you survive 4 or more years.
Gifting can be a simple way to reduce your estate’s value—just make sure it’s done properly to avoid any surprises.
Using Your Pension Wisely
At the moment, pensions offer generous tax treatment. If you die before the age of 75, your pension pot can usually be passed on tax-free. This has made pensions a useful tool in estate planning.
However, from April 2027, changes mean pensions are treated more like other assets for inheritance tax purposes. If you're thinking about leaving your pension as part of your estate, it’s worth reviewing your plans with a financial adviser.
Setting Up a Trust
Trusts allow you to give money away—but with more control. For example, you may want to make sure a younger family member doesn’t access their inheritance too early.
Most trusts still fall under the seven-year rule, and discretionary trusts especially need professional help to set up and manage. But they can be a powerful tool if used properly.
Life Insurance in a Trust
A life insurance policy can provide your loved ones with a lump sum after you pass away—and if placed in trust, it won’t be counted as part of your estate for IHT purposes.
This means:
- The money is paid directly to your chosen beneficiaries
- There’s no inheritance tax on the payout
- The funds are usually available quickly, without waiting for probate
Premiums can get more expensive as you age, so it’s wise to explore this option sooner rather than later. A financial adviser can help set up the policy in the right way or review existing cover which can be put into a Trust at any time after being set up.
Invest in Small Companies
To encourage investment in smaller business ventures, the Government offers Business Relief for Inheritance Tax. If you hold shares in qualifying firms for at least two years, they may be passed on free from inheritance tax.
However, these businesses are often high-risk investments and are subject to thresholds and allowances. It’s important to speak with a financial adviser to see if this option fits your financial goals and risk tolerance.
Support a Charity
Giving to charity not only helps causes you care about, it can also reduce your inheritance tax bill. Money given to UK-registered charities is excluded from your estate for inheritance tax purposes, whether it's given during your lifetime or left in your will. If your charitable donation on death is more than 10% of your net estate (after allowances) this can reduce your rate of inheritance tax from 40% to 36%.
You're Not Alone
Inheritance tax planning can feel complicated—but you don’t have to face it on your own. Speaking to a trusted financial adviser can give you clarity, control, and confidence as you make decisions about your future.
Ready to Take the Next Step?
Get in touch today for a friendly, no-pressure chat about your circumstances. We’d love to help you build the future you and your family deserve.
This article does not constitute financial advice. Please seek professional guidance tailored to your individual needs.
