How to Reduce Inheritance Tax Legally in the UK

Reviewed by Ed WilkinsonLast updated: April 24, 2026 1:45 pm

Image credit: Nataliya Vaitkevich @Pexels

Inheritance tax (IHT) reduces the value passed on to loved ones, and in some cases, this can be a significant amount. The current rate of inheritance tax is 40%. This is only applied to the portion of an estate that surpasses thresholds and exemptions. Inheritance tax is rarely fully avoidable; however, there are several ways to legally reduce exposure by making full use of available allowances and rules.

The sections below outline the main strategies used to reduce inheritance tax exposure.

We suggest this article should be used in tandem with our article “Inheritance Tax in the UK: A Simple Guide to Rules, Rates and Allowances” for a more thorough understanding.

When Does Inheritance Tax Apply?

Inheritance tax applies when the value of an estate exceeds certain thresholds. Every individual has a nil-rate band of £325,000, which can be passed on without tax. An additional £175,000 may apply when direct descendants are left a qualifying residence. Direct descendants include children, stepchildren, and grandchildren.

Some transfers can fall outside the scope of tax, such as when assets are left to a civil partner, spouse, or qualifying charity. Political parties and some community organisations, including specific sports clubs, may also qualify.

Changes have been proposed for April 2027 that bring unused pension funds more in line with how estate assets are currently evaluated. Currently, unused pension funds are excluded from the estate; however, the changes would mean that pensions fall within estate calculations and may become subject to inheritance tax if the proposals are implemented.

Making Full Use of Available Allowances

Allowances form the backbone of most inheritance tax strategies. Used effectively, they can significantly reduce the taxable value of an estate.

The nil-rate band and residence nil-rate band can both be transferred between spouses or civil partners if unused. This means a combined threshold of up to £1 million may be available in certain cases.

Annual gifting allowances should also be considered. Up to £3,000 can be gifted each tax year. This can be given to one recipient or to multiple recipients. When the allowance is completely unused, it can be brought forward for one year only, allowing a total of £6,000.

Small gifts up to £250 per person can be made to as many individuals as desired, provided they do not also benefit from the £3,000 allowance.

Wedding gifts provide another opportunity, with limits based on the relationship to the recipient. Parents may give more than grandparents or other relatives, creating flexibility in family support.

Wedding Gift Allowances:

• Direct child – £5000
• Grandchild – £2500
• Anyone else – £1000

Passing Wealth to a Spouse or Civil Partner

Transfers between spouses or civil partners are one of the most secure ways to reduce inheritance tax. There is no upper limit on what can be passed between legally recognised partners, both during life and on death.

The spouse or civil partner exemption allows inheritance tax to be deferred until the second death. Similarly, unused allowances can also be transferred (primarily the nil-rate and residence nil-rate bands), resulting in double the thresholds available to the surviving partner’s estate.

For couples who are not legally married or in a civil partnership, this exemption does not apply. That distinction can have a considerable impact on estate planning decisions.

Reducing Your Estate Through Lifetime Gifting

Gifting during a lifetime can gradually reduce the value of an estate. A wide range of assets may be given away, including money, property, investments, and personal possessions.

However, not all gifts fall outside inheritance tax immediately. Timing plays a key role, and gifts may still be counted depending on when they were made.

Giving away assets can affect financial security in the long term, especially if unexpected future costs arise, such as rising care costs or unexpected property costs.

Another important factor involves control. Once an asset has been gifted, it no longer belongs to the original owner. Its future use or value cannot be guaranteed.

The Seven-Year Rule & Its Impact on Plans

The seven-year rule is a framework for how gifts are treated for inheritance tax purposes. Gifts made seven or more years before death generally fall outside the estate and will not be considered under inheritance tax, although other taxes, such as income and capital gains tax, may still apply.

Should death occur within seven years, inheritance tax can still apply. However, the rate tapers depending on the time elapsed:

• Under three years: 40%
• Three to four years: 32%
• Four to five years: 24%
• Five to six years: 16%
• Six to seven years: 8%
• Seven years or more: no tax

This reduction in tax over time is known as taper relief. It only applies when the total value of gifts exceeds the nil-rate band.

It is also important to note that gifts use up the tax-free allowance first. Larger gifts can reduce the allowance available for the rest of the estate, potentially increasing the tax burden on other assets.

Utilising Trusts to Control & Protect Wealth

Trusts can offer a route to manage how assets are passed on in a more structured way. They allow funds or property to be held for beneficiaries under specific conditions.

Inheritance tax exposure can sometimes be reduced by placing assets into a trust. However, this is not guaranteed, and certain trusts can trigger immediate tax charges or ongoing obligations, so they may not always be the correct solution for your needs.

Property protection trusts are one example often included in wills. These arrangements can aim to keep a share of a family home for children while a surviving partner remains living there.

Although trusts can offer advantages, they are subject to complex rules. In some circumstances, authorities may still consider assets when assessing eligibility for care funding, particularly if deprivation of assets is suspected.

The Role of Pensions in Estate Planning

Pensions have traditionally been treated differently from other assets. In many cases, they sit outside the estate for inheritance tax purposes.

This has made them an attractive option for passing on wealth. However, proposals suggest that from April 2027, unused pension funds may be included in estate calculations.

Should these changes be implemented, large pension pots may need to be reconsidered, and individuals may need to reassess how they balance pension savings with other investments.

Leaving Money to Charity and Tax Benefits

Charitable giving can reduce inheritance tax while supporting causes that matter. Gifts to registered charities are exempt from tax, regardless of value.

Where at least 10% of an estate is left to charity, the rate of inheritance tax applied to the remaining taxable portion may be reduced from 40% to 36%.

This strategy can help to combine personal values with financial efficiency.

Planning Ahead for Property and Large Assets

Property often represents a substantial share of an estate’s value. Decisions around ownership, gifting, or retention can influence the final tax position.

Gifting property during your lifetime may help reduce inheritance tax. However, complications can arise if you continue to benefit from the property after it has been given away. Under HMRC rules, this situation is formally known as a “Gift with Reservation of Benefit” (GROB). For example, living in a gifted home without paying a full market rent is a common case of a GROB, and it can result in the property still being treated as part of your estate for inheritance tax purposes.

Selling assets below market value can also create a taxable gift, based on the difference between the sale price and the true value.

Ownership structure matters too. Joint ownership arrangements may lead to different outcomes depending on how the asset is held.

Using Regular Reviews to Strengthen Your Strategy

Estate planning is not static and should not be treated that way. Changes in personal circumstances, financial position, or legislation can all affect outcomes.

Regular reviews ensure that plans remain in line with current goals and intentions. Checking beneficiary nominations, refreshing documents, and assessing gifting strategies can all help maintain an effective hands-on approach.

Keeping clear records of gifts is equally important. Details such as value, timing, and recipients may be required when assessing inheritance tax.

Professional advice can add clarity, particularly where estates involve multiple assets or complex family arrangements.

A Financial Adviser Can Help

Inheritance tax planning can quickly become complex, particularly where multiple assets, family arrangements, or future rule changes are involved. While general guidance can provide a foundation, tailored advice often makes a meaningful difference.

A financial adviser can assess the full picture, including property, pensions, investments, and gifting strategies. This allows for a more coordinated approach, ensuring that available allowances are used effectively while avoiding unintended consequences.

Advice can also help you navigate more technical areas, such as trust structures, tax-efficient withdrawals, and long-term planning in response to proposed legislative changes. For those with larger estates or business interests, this level of detail becomes increasingly important.

Working with a regulated adviser provides an added layer of reassurance. They can explain options clearly, outline potential risks, and help ensure that any plan remains aligned with both personal goals and current regulations.

FinancialAdvisers.co.uk can help you find a regulated adviser by introducing you to an FCA-authorised firm in your area.

This content is intended for general information and should not be treated as personal financial advice.