You’ve worked hard to build what you have, so it’s natural to want as much of it as possible to go to the people you care about. Inheritance tax can affect how much your family eventually receives, but with thoughtful planning, there may be ways to reduce the amount that could be due.
The important thing is to plan ahead. From making gifts and using available allowances to thinking about how your estate is structured, there are a number of legitimate options to consider. Which ones are right for you will depend on your finances, your family and, importantly, what you need to keep for your own future.
In this guide, we explain how inheritance tax works, the thresholds that apply and some of the ways you could potentially reduce a future bill while still putting your own financial needs first. It’s general information rather than personal advice, and tax rules can change.
What inheritance tax could mean for your estate
Inheritance tax is a tax that may be due on the estate you leave behind when you die. Your estate includes things such as your home, savings, investments and possessions, as well as money owed to you, with any debts taken into account.
Not everything you leave behind will necessarily be taxed. There are tax-free allowances available, and inheritance tax is generally charged at 40% on the part of your estate that falls above the allowances available to you.
That’s why understanding the value of your estate and the allowances you could qualify for matters. It can help you see whether inheritance tax is likely to affect your family and where there may be opportunities to plan ahead.
How much could you pass on without inheritance tax?
There are two main inheritance tax allowances that can help determine how much of your estate could be passed on without inheritance tax being due.
The first is the nil-rate band, currently £325,000 for each individual. In simple terms, this means up to £325,000 of your estate can usually be passed on before inheritance tax becomes payable. This allowance is currently set to remain at £325,000 until April 2031.
There’s also the residence nil-rate band, which could give you an additional allowance of up to £175,000 if you leave a qualifying home to direct descendants, such as your children or grandchildren. If your estate is worth more than £2 million, this additional allowance starts to reduce.
Together, these allowances mean you could potentially pass on up to £500,000 without inheritance tax. For spouses and civil partners, unused allowances can potentially be transferred, meaning a couple could ultimately pass on as much as £1 million between them.
The full amount isn’t available to everyone, though. What you can pass on tax-free will depend on the value of your estate, who you leave it to and whether you meet the conditions for the additional residence allowance. Knowing which allowances apply to you can give you a much clearer idea of whether inheritance tax is something your family may need to plan for.
Why inheritance tax is affecting more families
Inheritance tax is no longer something only the wealthiest families need to think about. While the main tax-free allowances have stayed at the same levels, the value of many homes, savings and investments has grown. Over time, that can bring more estates within reach of inheritance tax.
You might not consider yourself particularly wealthy, but the value of your home alongside your savings, investments and other assets can add up to more than you expect. That’s why it can be worth understanding the value of your estate before inheritance tax becomes an immediate concern.
With the main allowances currently frozen until April 2031, planning ahead could become increasingly important for more families. Knowing where you stand now gives you more time to consider your options and decide what, if anything, you’d like to do.
How inheritance tax can add up
It’s one thing to know the inheritance tax thresholds, but another to see what they could mean for your family. Take a married couple who own their home, have built up savings and investments over the years, and ultimately want to leave everything to their children.
Assets can generally pass between spouses and civil partners without inheritance tax. Any unused inheritance tax allowances can also potentially pass to the surviving partner. So, where all the relevant conditions are met, the surviving partner could eventually have the benefit of two nil-rate bands and two residence nil-rate bands. That’s where the often-quoted figure of up to £1 million comes from.
The important part is what happens beyond that figure. When the surviving partner’s estate is eventually valued, their home, savings and investments all need to be considered. Under planned changes from April 2027, certain unused pension funds and death benefits are also expected to form part of the estate for inheritance tax purposes. Anything above the allowances available could then be taxed at 40%.
For many families, reaching that point can happen more easily than they expect. A home that has risen in value, investments that have grown and money built up over a lifetime can gradually create a larger estate, even if you’ve never thought of yourself as particularly wealthy.
That’s why it’s worth looking at the whole picture early. The £1 million figure isn’t an automatic tax-free allowance for every couple, and waiting until inheritance tax becomes an obvious concern can leave you with fewer options. Understanding where you stand gives you more time to consider what you want to pass on, what you need to keep for yourself and whether any planning could make a difference.
These figures are illustrative and your own position will depend on your circumstances and the tax rules in force at the time. Financial advice can help you understand how the rules apply to you and explore the options available.
Ways to pass on more of what you’ve built
Inheritance tax planning is really about making thoughtful decisions about what you want to keep for your own future and what you’d like to pass on to the people and causes that matter to you. There are several established allowances and exemptions that could help reduce a future inheritance tax bill, particularly when they’re considered early.
The right approach will be different for everyone. You need to be comfortable that you’ll still have enough for the life you want, including any unexpected costs later on. With that in mind, here are some of the options worth understanding.
Make use of your gifting allowances
You can give away up to £3,000 each tax year using your annual exemption. If you didn’t use the previous year’s allowance, you can carry it forward for one tax year, potentially giving you an exemption of up to £6,000.
There are other exemptions too, including certain small gifts and gifts for weddings or civil partnerships. These may seem like relatively modest amounts, but used regularly over time, they can help you pass money to family during your lifetime while gradually reducing the value of your estate.
Give more during your lifetime
If you want to make a larger gift to someone, it can potentially fall outside your estate for inheritance tax purposes if you live for seven years after making it. This is often known as the seven-year rule.
If you die within those seven years, inheritance tax may still need to be considered. In some circumstances, taper relief can reduce the tax due on a gift after three years, although it doesn’t simply reduce the value of the gift itself.
Giving money away is a significant decision because you may not be able to get it back if your circumstances change. The aim is to find a balance between helping the people you care about and keeping enough for your own plans and needs.
Turn surplus income into support for your family
If you regularly have income left over after meeting your usual living costs, you may be able to give some of that surplus away without it becoming part of your estate for inheritance tax purposes.
There are specific conditions to meet, including showing that the gifts form part of your normal expenditure and don’t affect your usual standard of living. Keeping clear records is important. For the right person, though, it can be a valuable way to support family now rather than waiting to pass everything on later.
Leave a legacy to a cause you care about
Money or assets left to qualifying charities are generally exempt from inheritance tax. If you leave at least 10% of the relevant net estate to charity, the inheritance tax rate on the taxable part of that estate may also reduce from 40% to 36%.
If charitable giving is already part of what you want your legacy to achieve, this can be worth considering alongside what you hope to leave to your family.
None of these options should be looked at in isolation. What makes sense depends on your estate, your income, your family and what you may need in the years ahead. The goal isn’t simply to pay less tax. It’s to find a way of passing on your wealth that works for you as well as the people you want to benefit.
Make sure your wishes are reflected in your will
Your will is what turns your wishes into clear instructions about who should inherit what you leave behind. It’s also an important part of making your wider inheritance tax planning work as intended.
If you die without a valid will, the law decides who inherits under the rules of intestacy. Those rules won’t necessarily reflect the people you consider family. An unmarried partner, for example, has no automatic right to inherit, regardless of how long you’ve been together. Stepchildren you haven’t legally adopted may not automatically inherit either.
A well-drafted will can also help make sure the inheritance tax allowances available to your estate are used effectively, including the residence nil-rate band and the potential transfer of unused allowances between spouses and civil partners.
But a will shouldn’t be something you write once and forget about. Marriage, divorce, children or grandchildren, changes in your relationships, or simply building more wealth over time can all affect what you want to happen. Reviewing your will after significant life changes helps keep it aligned with your wishes and wider estate planning.
Writing or updating a will is legal work rather than financial advice, so you’ll need a solicitor to do this. Where appropriate, we can introduce you to one of our partner firms, helping your financial planning and legal arrangements work together rather than being considered separately.
When a trust could have a place in your plans
Trusts can be a useful way to pass on wealth while having more say over how and when it’s used. They can be particularly helpful where simply giving money or assets outright doesn’t give you the control or reassurance you’re looking for.
For example, imagine you want to leave money to your grandchildren, but they’re still young. Rather than them receiving a large sum outright, a trust could allow the money to be looked after for them and made available at a particular age or in line with the terms you’ve set. Trusts can also be worth considering when supporting someone who’s vulnerable or when your family circumstances are more complex.
But a trust isn’t simply a way to make inheritance tax disappear. Different trusts have different tax rules, and putting assets into one can affect the control and access you have over them. There can also be tax charges and ongoing responsibilities for the people appointed to look after the trust.
That’s why it’s important to start with what you want to achieve, rather than assuming you need a trust. We can help you explore whether one could have a role in your wider financial and inheritance tax planning, and consider it alongside what you need to keep for your own future.
Setting up a trust involves legal work, so the structure and documentation need to be handled by a solicitor. Where appropriate, we can introduce you to one of our partner firms, helping the financial planning and legal work fit together.
Pensions and inheritance tax are changing
Pensions have traditionally sat outside your estate for inheritance tax purposes, which has made them an important part of how some families plan to pass wealth on. From 6 April 2027, that position changes, with most unused pension funds and pension death benefits brought into the value of your estate for inheritance tax purposes.
This matters because your pension won’t be looked at on its own. Its value will be added to your home, savings, investments and other assets when working out the value of your estate. So even if inheritance tax hasn’t previously been a concern, adding a substantial pension could take your estate above the available allowances.
There’s another potential knock-on effect for larger estates. The residence nil-rate band, which can provide an additional inheritance tax allowance when a qualifying home is left to direct descendants, starts to reduce once an estate is worth more than £2 million. It reduces by £1 for every £2 above that threshold. Bringing unused pension wealth into the estate could therefore not only increase its taxable value, but also reduce the residence nil-rate band available. This interaction is one of the issues highlighted in our video below.
For example, imagine someone has a home, savings and investments worth £1.9 million and an unused pension worth £300,000. Under the new rules, that pension could take the estate used for inheritance tax purposes to £2.2 million. As well as bringing the pension into the calculation, crossing the £2 million threshold could start to reduce the residence nil-rate band they might otherwise have been able to use. The actual inheritance tax position would depend on their circumstances, including who inherits the estate and which allowances are available.
There are important exceptions too. Assets passing to a spouse or civil partner can generally still benefit from the spouse exemption, and death-in-service benefits from registered pension schemes are excluded from the new pension rules.
None of this automatically means you should start taking more money from your pension or change your plans before April 2027. A pension’s first job is usually to help fund your retirement, and decisions about withdrawals can have other tax and financial consequences. Instead, the change is a reason to look again at your pension as part of your whole financial picture, particularly if you’ve deliberately left pension savings untouched because you planned to pass them on.
In the short video below, our team explains what’s changing, who could be affected and why the interaction between pensions and your inheritance tax allowances is worth understanding now.
Inheritance tax mistakes that can cost you later
Good inheritance tax planning isn’t only about knowing what you can do. It’s also about avoiding some of the decisions and assumptions that can limit your options later. These are some of the most common ones to watch for.
Assuming inheritance tax won’t affect you
It’s easy to think inheritance tax is something only very wealthy families need to worry about. But once you bring together your home, savings, investments and other assets, your estate may be worth more than you realise. Understanding the numbers early gives you time to decide whether any action is needed.
Leaving planning until later
Some of the most useful inheritance tax planning relies on time. Larger gifts, for example, generally need seven years before they fall fully outside your estate for inheritance tax purposes. The earlier you understand your position, the more choices you’re likely to have.
Making gifts without keeping good records
Giving money away can be an effective part of your plans, but documenting what you’ve given, when and why matters. This is particularly important for regular gifts made from surplus income, where your executors may need to show that the conditions for the exemption were met.
Letting your will fall out of date
Your will needs to keep pace with your life. Marriage, divorce, new children or grandchildren, changing relationships and significant changes in your finances can all affect what you want to happen. An outdated will could mean your estate isn’t passed on in the way you intended or that your wider planning doesn’t work as expected.
Forgetting that pension rules are changing
From April 2027, most unused pension funds and certain death benefits will be brought into the inheritance tax calculation. If your plans were built around pensions sitting outside your estate, it’s worth reviewing whether they still achieve what you want them to.
Treating each decision separately
Inheritance tax planning works best when you look at everything together. Your home, pensions, savings, investments, gifts and will can all affect the bigger picture. Bringing them together helps you see how one decision could affect another, while making sure reducing tax doesn’t come at the expense of your own financial security.
The aim isn’t to make every possible change. It’s to understand where you stand early enough to make considered decisions about what you keep, what you give away and what you ultimately want to leave behind.
Where to start with inheritance tax planning
You don’t need to know exactly what you want to do before you start. The first step is understanding where you stand today, what your estate could be worth and whether inheritance tax is likely to affect what you leave behind.
From there, it’s about looking at the whole picture. Your home, pensions, savings, investments, gifting and available allowances can all influence your inheritance tax position. Bringing them together can help you understand where there may be opportunities to plan, rather than making decisions in isolation.
Good planning also needs to balance two things: what you’d like to pass on and what you need to keep for yourself. Giving more away isn’t necessarily the answer. The right approach should support the life and retirement you want while helping you pass on your wealth in a way that reflects your wishes.
With the inheritance tax treatment of pensions changing from April 2027, it’s also worth revisiting plans made under the current rules. For some families, the change could significantly alter their inheritance tax position.
Inheritance tax planning is part of the bigger retirement and later-life picture. Starting early gives you time to understand your options, make considered decisions and review them as your life and circumstances change.