What Is Inheritance Tax and How Can You Legally Reduce Your Bill?
Inheritance tax is one of those topics that makes people’s eyes glaze over. It feels complicated, it sounds expensive, and most people assume it’s something to worry about later rather than now.
But here’s the thing – a lot of families end up paying more inheritance tax than they need to, simply because they haven’t planned ahead. And with the right advice, it doesn’t have to be as daunting as it sounds.
In this article we cover what inheritance tax is, who pays it, and what you can potentially do to reduce your overall bill.
What Is Inheritance Tax?
Inheritance Tax – commonly referred to as IHT – is essentially a tax on what you leave behind. It’s charged on the value of your estate when you die, and it’s paid before your beneficiaries receive anything due to them. So your loved ones won’t be out of pocket – the tax comes out of the estate first.
The standard rate is 40%, charged on the value of the estate above the tax-free threshold.
It’s one of the most disliked taxes in the UK – and one of the most misunderstood. The good news is that not every estate pays it. Thanks to tax-free allowances, exemptions and reliefs, IHT is payable on fewer than one in twenty estates.
Who Pays Inheritance Tax?
IHT is paid from the estate itself rather than by the beneficiaries directly. It would be unusual for a beneficiary to pay IHT out of their own pocket, though it can depend on what they intend to do with certain estate assets.
The executor is responsible for making sure the tax is paid to HMRC – and it must be paid within six months of the date of death. Miss that deadline and interest starts to accrue. The current rate HMRC charges on late or unpaid IHT is 8.75% per annum, so it’s not something to leave sitting.
What Are the Inheritance Tax Thresholds?
UK IHT thresholds have been frozen since 2009, and current legislation extends that freeze until April 2031. The nil rate band – the amount each individual can pass on free of IHT – is currently £325,000.
Some estates can also benefit from the residence nil rate band, currently £175,000. This applies where a family home is passed to direct descendants, and it brings the total tax-free threshold for qualifying individuals up to £500,000.
Married couples and civil partners can transfer any unused allowances between them, meaning a combined threshold of potentially up to £1 million may be available on second death.
With thresholds frozen and property values continuing to rise, more and more estates are being pulled into IHT territory – often without families realising it. And from 6 April 2027, unused pension funds and death benefits will also be included in a person’s estate for IHT purposes, which will bring even more estates into scope.
What Is Exempt From Inheritance Tax?
If you leave your estate to your spouse or civil partner, no IHT will be payable – and your allowances will be available on second death.
There are conditions to be aware of, however. The residence nil rate band starts to be reduced for estates worth more than £2 million, so larger estates may need more detailed planning.
Gifts to UK registered charities are also fully exempt – and worth noting, leaving 10% or more of your estate to charity can also reduce the IHT rate on the remainder from 40% to 36%.
Business Property Relief and Agricultural Property Relief can offer significant IHT savings for qualifying assets, though the rules are complex and have recently changed. Certain assets can also be placed into lifetime trusts to reduce your estate, but again, the rules around this require careful professional advice.
What Gifts Can You Make During Your Lifetime to Reduce IHT?
Lifetime gifting is one of the most effective ways to reduce an IHT liability – and one that many people overlook entirely.
The Annual Gift Allowance
You can give away £3,000 each tax year using your annual IHT exemption. If you didn’t use it in the previous tax year, you can generally carry it forward for one year. It’s a simple, underused tool that can make a meaningful difference over time.
Small Gifts and Wedding Exemptions
You can also make gifts of up to £250 per person per tax year to as many people as you wish, provided the relevant conditions are met. This can’t be combined with the annual exemption for the same person.
There are also specific exemptions for gifts made in connection with a wedding or civil partnership:
- Up to £5,000 from a parent or step-parent
- Up to £2,500 from a grandparent
- Up to £1,000 in other cases
These amounts may seem modest on their own, but used consistently as part of a longer-term estate plan, they add up.
Regular Gifts From Surplus Income
This is one of the most powerful IHT exemptions available – and one of the most commonly overlooked.
Gifts made regularly from surplus income can fall outside your estate entirely, provided they form part of your normal expenditure, are made from income rather than capital, and don’t affect your standard of living. If you have a substantial pension, investment income, rental income or employment income, this can be an extremely useful planning tool.
Good record-keeping is essential. Keep clear details of what you gave, to whom, and when.
The Seven Year Rule
Larger gifts can fall outside your estate completely – but you need to survive for seven years after making the gift.
If you die within seven years, the gift may still be taken into account when calculating the estate’s IHT liability. However, taper relief can reduce the tax payable on certain gifts where death occurs more than three years after the gift was made. This is an area where professional advice before making substantial gifts is particularly valuable.
How Can Trusts Help Reduce Inheritance Tax?
Assets placed in certain trusts can reduce IHT by moving them outside your estate – but the benefit depends on the type of trust involved and when the transfer was made. There are important limitations, and getting the structure right matters. It’s always worth taking proper advice before placing any asset into a trust.
What About Business and Agricultural Assets?
If you own a business, shares in certain qualifying companies, or agricultural property, you may qualify for valuable IHT reliefs.
The rules changed from 6 April 2026. Under current legislation, 100% relief on qualifying agricultural and business property is now limited to a combined £2.5 million allowance per individual. Qualifying value above that allowance generally attracts 50% relief. Specific rules and conditions determine whether assets qualify.
If you own a business or farm, succession planning and IHT planning need to be considered well in advance – not at the point where they become urgent.
What Is Taper Relief and How Does It Work?
Taper relief applies to gifts made between three and seven years before death and reduces the amount of IHT payable on a sliding scale:
- Three to four years before death – 20% reduction
- Four to five years – 40% reduction
- Five to six years – 60% reduction
- Six to seven years – 80% reduction
- Over seven years – fully exempt
The message is simple: make gifts early and keep thorough records of them.
What Changes Are Coming to Inheritance Tax?
Pensions have historically sat outside your estate for IHT purposes. That’s changing.
From 6 April 2027, unused pension funds may be brought into a person’s estate for IHT purposes. This is a significant shift that will affect many more families than currently pay IHT – and it’s why it’s increasingly important to look at your estate as a whole rather than considering your property, investments, pensions and business interests separately.
If you haven’t reviewed your estate planning recently, now is a good time to do so.
Common Inheritance Tax Mistakes to Avoid
A few things come up again and again:
Not reviewing or updating your will to make sure all available allowances are being properly protected is one of the most common. Assuming your estate won’t be affected without actually checking the figures is another.
Failing to make use of the annual gift allowance each year is a missed opportunity that compounds over time. Leaving pension nomination forms out of date is increasingly significant given the upcoming changes.
And waiting too long to take advice is probably the most costly mistake of all – some IHT planning options, like the seven year rule, take years to take full effect. The earlier you start, the more options you have.
Frequently Asked Questions
What is the inheritance tax rate in the UK?
The standard rate is 40%. In some circumstances this can be reduced to 36% if you leave 10% or more of your estate to charity.
How much can I inherit before paying inheritance tax?
The standard nil rate band is currently £325,000. An additional residence nil rate band of £175,000 may be available if you leave a qualifying property to direct descendants. For married couples and civil partners, unused allowances can potentially be transferred, meaning up to £1 million may be free of IHT.
Does a spouse have to pay inheritance tax?
In most cases, no. Assets left to a spouse or civil partner are generally exempt from IHT.
Can I avoid inheritance tax by giving money away?
Lifetime gifting can reduce the value of your estate. You have an annual gift exemption of £3,000 per tax year, along with certain exemptions for small gifts, wedding gifts and gifts out of excess income. It’s worth being careful though – if you give an asset away but continue to benefit from it, it may not be removed from your estate in the way you expect.
What is the seven year rule for inheritance tax?
If you make a gift and survive for seven years, there is usually no IHT to pay. If you die within those seven years, the gift may still be taken into account and brought back into your estate.
Do I pay inheritance tax on a property left to me?
The estate is usually liable for IHT rather than the individual beneficiary, but if you’re planning to transfer rather than sell assets, it’s worth taking legal advice on the implications.
How do I reduce my inheritance tax bill legally?
Depending on your circumstances, options include making lifetime gifts, using available exemptions, making charitable gifts, and making regular gifts from excess income. Professional advice will help you identify which options are most suitable for your situation.
Will pension pots be included in inheritance tax from 2027?
Yes, in many cases. From April 2027, unused pension funds are expected to be included in the estate for IHT purposes. This is a significant change and means more estates will be liable to IHT than before.
Start Planning Now – Not Later
Inheritance tax planning can feel complicated and a little uncomfortable to think about. But the earlier you start, the more options you have – and the more you can potentially protect for the people you love.
At Liberay Legal, we offer specialist wills and estate planning advice across Bolton and the surrounding area. Led by Lisa Kirk, Head of Private Client, our team provides plain English advice tailored to your specific circumstances – whether that’s drafting or updating a will, setting up a trust, or looking at your estate as a whole.
Get in touch today for a free initial consultation. No jargon, no obligation – just clear, practical advice when you need it.
Contact us here or call 03330 115 105.
