Use your allowances and the nil rate bands
The foundation of any plan is making full use of the allowances you already have. Every individual has a nil rate band of £325,000, and a residence nil rate band of £175,000 where a main home passes to direct descendants. Married couples and civil partners can transfer unused bands to the survivor, so between them they can often pass on up to £1,000,000 free of Inheritance Tax.
Making the most of these bands often comes down to how assets are owned and how a will is drafted. For example, ensuring that a main home is left to children or grandchildren can secure the residence nil rate band, while a poorly drafted will might accidentally lose it. Reviewing your will and the way your assets are held is one of the simplest and most effective steps, and it costs nothing in tax to get right.
It is worth remembering that the residence nil rate band is tapered for estates above £2,000,000, so reducing the size of a very large estate can also restore allowances that would otherwise be lost. The starting point is always to understand your numbers, which our guide to Inheritance Tax explained can help with.
Make use of gifts
Lifetime gifting is a powerful tool. You can give away up to £3,000 each tax year under the annual exemption, make small gifts of up to £250 per person, and make exempt wedding gifts within limits. Regular gifts out of surplus income can also be exempt, provided they do not affect your standard of living and are properly recorded.
Beyond these everyday exemptions, larger gifts can fall outside your estate entirely if you survive for more than 7 years after making them. Gifts within 7 years can be caught, with taper relief reducing the tax on larger gifts made between three and seven years before death. Because the timing and ordering of gifts matters so much, our dedicated guide to gifts and the 7 year rule is well worth reading before you give significant sums away.
The key with gifting is balance. Giving too much, too soon can leave you short later in life, so the right level of giving depends on your own needs as much as on tax. A gift you cannot afford is rarely a good idea, however attractive the tax saving looks on paper.
Charity and pensions
Giving to charity can reduce Inheritance Tax in two ways. Anything left to charity is itself exempt, and if you leave at least 10 percent of your net estate to charity, the rate of Inheritance Tax on the rest of the estate falls from 40 percent to 36 percent. For those who already intend to give, structuring that giving carefully can benefit both the charity and the family.
Pensions have long been a useful way to pass on wealth, because unused pension funds have often sat outside the estate for Inheritance Tax. This is changing. From April 2027, unused pension funds are planned to be brought within Inheritance Tax. This is a significant change, and it means that decisions about pensions, drawdown and the order in which different assets are used in retirement deserve fresh thought. What looked settled may now need reviewing, and acting in good time is sensible.
A worked example
A couple passing on their home using both sets of bands
Consider a married couple who own a home worth £500,000 and have £400,000 of savings and investments, giving a combined estate of £900,000. They want their home and savings to pass to their two children.
When the first of them dies, everything passes to the survivor under the spouse exemption, so no Inheritance Tax is due and the first allowances are preserved. On the second death, the survivor can use two nil rate bands of £325,000, which is £650,000, plus two residence nil rate bands of £175,000, which is £350,000, where the home passes to the children.
That gives combined allowances of £1,000,000. As their estate of £900,000 is below this, there would be no Inheritance Tax to pay, and the full estate would pass to the children. Careful will drafting is what makes this outcome reliable, because the residence nil rate band depends on the home going to direct descendants.
This illustration assumes the home passes to direct descendants and that the transferable bands are claimed. The position would differ for an unmarried couple or a larger estate.
Common mistakes
One common mistake is giving away assets without thinking about your own future needs. People sometimes hand over property or large sums and later find themselves financially stretched. Tax should never be the only consideration. Another error is continuing to benefit from an asset you have given away, which can mean the gift is ignored for Inheritance Tax under the reservation of benefit rules.
Couples sometimes assume the transferable nil rate band is automatic. It is not. A claim must be made on the second death, supported by records from the first. Out of date wills are another frequent issue, particularly where family circumstances have changed. Finally, many people overlook the April 2027 pension change, and base plans on rules that are due to alter.
Why advice matters and what to do
Inheritance Tax planning is genuinely complex, and the right approach depends on your family, your assets, your health and your wishes. What works well for one person can be entirely wrong for another. There is no single right answer, which is precisely why individual advice is so valuable. A plan should fit your life first and reduce tax second.
A good starting point is to estimate your estate, review your will and check whether you are using your allowances. From there, you can consider gifting, charitable giving and how the coming pension change affects you. If you would like help building a plan that suits your circumstances, you can book a call with us, or start your quote to begin. We will keep the advice clear, balanced and tailored to you.
A balanced look at the legitimate steps that can reduce a future Inheritance Tax bill, from using your allowances to giving to charity, and why advice is so important.
Frequently asked questions
What are the main ways to reduce Inheritance Tax?
The main legitimate steps are using your nil rate band and residence nil rate band fully, making use of exempt and lifetime gifts, leaving assets to a spouse or civil partner, giving to charity and reviewing your will. The right mix depends on your circumstances.
Does leaving money to charity reduce the tax?
Yes. Gifts to charity are exempt from Inheritance Tax, and if you leave at least 10 percent of your net estate to charity, the rate on the rest of the estate falls from 40 percent to 36 percent. This can benefit both the charity and your family.
How do pensions affect Inheritance Tax?
Unused pension funds have often sat outside the estate for Inheritance Tax. From April 2027, unused pension funds are planned to be brought within Inheritance Tax, which is a significant change. Decisions about pensions and retirement income deserve fresh thought as a result.
Can a couple really pass on £1,000,000 tax free?
Many can. Two nil rate bands of £325,000 and two residence nil rate bands of £175,000 can combine to give £1,000,000 of allowances, where a main home passes to direct descendants. It depends on the transferable bands being claimed and the will being drafted correctly.
Is reducing Inheritance Tax legal?
Yes. Using the allowances, exemptions and reliefs that the rules provide is entirely legitimate. The steps in this guide rely on established rules rather than anything artificial. The key is to use them sensibly and in a way that suits your own needs.
Why do I need advice for Inheritance Tax planning?
Inheritance Tax planning is complex and depends heavily on personal circumstances, including your family, assets, health and wishes. What suits one person may be wrong for another, so individual advice helps you build a plan that fits your life and avoids costly mistakes.