You can legally avoid or reduce inheritance tax (IHT) by using your allowances, leaving your estate to a spouse or civil partner, giving gifts early, leaving at least 10% of your estate to charity and using trusts or life insurance written in trust. IHT is charged at 40% on the part of an estate above £325,000, or above £500,000 if you leave your home to children or grandchildren, and a couple can pass on up to £1 million. These thresholds are frozen until April 2031, so more families are being pulled in each year. Two recent changes matter most: from April 2026, 100% business and agricultural relief is capped at £2.5 million per person, and from April 2027 most unused pensions will count towards your estate.
How much inheritance tax do you pay in the UK?
Inheritance tax is 40% on the value of your estate above your tax-free allowances. Your estate means everything you own when you die, including property, savings, investments, vehicles and valuables. The allowances that reduce the taxable amount are:
- Nil-rate band: £325,000 per person, frozen until April 2031.
- Residence nil-rate band: up to £175,000 extra when you leave your home to direct descendants such as children, stepchildren and grandchildren. It tapers away by £1 for every £2 that your estate exceeds £2 million.
- Combined allowance: up to £500,000 per person, and up to £1 million for a married couple or civil partners who can transfer unused allowances to each other.
Most estates do not pay IHT. Government figures cited by Unbiased show fewer than 5% of estates paid it in 2022/23, but frozen thresholds and rising property values mean that share is growing. Check the latest figures on gov.uk before you publish.
Is it legal to avoid paying inheritance tax?
Yes. Avoiding inheritance tax by using reliefs, exemptions and allowances that Parliament has set out is legal, and HMRC expects you to use them. Evading it by hiding assets or lying about the value of an estate is a crime. The difference is that legal planning is open and documented, while evasion is concealed.
Some arrangements look like planning but do not work. If you give away your home but carry on living in it, for example, HMRC treats it as a gift with reservation and the property stays in your estate. Always take advice before restructuring ownership of your main assets.
Can you leave everything to your spouse or civil partner?
Yes. Anything you leave to a spouse or civil partner is generally exempt from inheritance tax, so no IHT is due on the first death. Any unused nil-rate band and residence nil-rate band also transfer to the survivor, which is how a couple can pass on up to £1 million to their children or grandchildren tax-free.
The transfer is a percentage of the unused allowance, not a fixed sum, and it applies to the band in force on the second death. If you remarry, no more than two nil-rate bands can be used in total. This is why wills matter: a poorly drafted will can waste an allowance on the first death.
How does the residence nil-rate band work?
The residence nil-rate band adds up to £175,000 to your tax-free allowance when you pass your main home to direct descendants. It brings the combined threshold to £500,000 for one person and up to £1 million for a couple.
Only direct descendants qualify: children, stepchildren, adopted and foster children, and their descendants. Nieces, nephews and friends do not. The band reduces once an estate is worth more than £2 million. If you downsized or moved into care and sold your home, you may still be able to claim a downsizing allowance, so check the gov.uk guidance.
How do gifts reduce inheritance tax?
Gifts reduce IHT because assets you give away leave your estate, either immediately or after seven years. Several gifts are exempt straight away:
- Annual exemption: £3,000 a year in total, and you can carry forward one unused year, so up to £6,000 in one go.
- Small gifts: £250 to as many people as you like, as long as they have not received another exempt gift from you that year.
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
- Gifts from surplus income: regular gifts that come from income, not capital, and leave your standard of living unchanged. Keep records to prove it.
Larger gifts are potentially exempt transfers (PETs). They fall outside your estate completely if you live for seven years after making them. Keep a record of every gift in case HMRC asks.
What is the seven-year rule and how does taper relief work?
The seven-year rule means a gift is free of inheritance tax if you survive seven years after making it. If you die sooner, tax may be due on the gift, but taper relief reduces the rate the longer you live:
| Years between gift and death | Tax rate on the gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
Taper relief only reduces the tax charged on gifts that exceed the nil-rate band, so it helps with larger gifts rather than small ones. Gifting early starts the clock sooner, but never give away so much that you cannot afford to live on what remains.
Does leaving money to charity reduce inheritance tax?
Yes. Gifts to UK registered charities are exempt from inheritance tax. If you leave at least 10% of your net estate to charity, the rate on the rest of your taxable estate falls from 40% to 36%. For some families, the charity gift costs the beneficiaries very little, because the lower rate offsets much of the gift.
Can trusts help avoid inheritance tax?
Trusts can take assets outside your estate, but the rules are complex and the tax treatment depends on the type of trust and when you set it up. Common arrangements include discretionary trusts, loan trusts and discounted gift trusts. HMRC does not like trusts created purely to save tax, and trusts can be contested, so they should serve a practical purpose such as protecting children from a first marriage or protecting assets for a vulnerable beneficiary. Take advice from a solicitor or adviser before setting one up.
How can life insurance help pay an inheritance tax bill?
A life insurance policy written in trust can pay the tax bill without adding to it. A standard policy counts as part of your estate, so the payout could be taxed at 40%. If the policy is written in trust, the proceeds go straight to your beneficiaries and sit outside the estate, which also means they get the money without waiting for probate. Many insurers let you set up the trust at no extra cost when you take out the policy.
Do business and agricultural reliefs still avoid inheritance tax?
Business property relief (BPR) and agricultural property relief (APR) still give 100% relief, but only up to a cap. From 6 April 2026, 100% relief applies to the first £2.5 million of combined qualifying business and agricultural assets per person, and 50% relief applies above that. Shares designated as not listed on recognised stock exchanges, such as AIM shares, receive 50% relief rather than 100%.
The cap was originally announced at £1 million in the Autumn 2024 Budget and raised to £2.5 million in December 2025. Farmers and business owners should review ownership, wills and succession plans now.
Will pensions be subject to inheritance tax?
From 6 April 2027, most unused pension funds and pension death benefits will be included in your estate for inheritance tax. Until then, pensions usually pass outside the estate. Death-in-service benefits from a registered pension scheme remain excluded. If your plan relies on leaving a pension untouched, review your drawdown strategy, your beneficiary nominations and any life insurance before the change takes effect.
When is inheritance tax due, and who pays it?
Inheritance tax is due six months after the end of the month in which the person died, and the executor normally arranges payment from the estate. HMRC charges interest on late payment. This catches many families out, because probate often takes longer than six months and property may need to be sold to raise the money. You can pay part of the tax within the deadline even if the estate is not fully valued, and a life insurance policy in trust can provide cash when it is needed.
What common mistakes should you avoid?
The most common IHT mistakes are ignoring the allowances, assuming every gift leaves your estate, and not planning how the bill will be paid.
- Ignoring the nil-rate and residence nil-rate bands. Review your will to make sure both are used.
- Assuming gifts always work. A gift made less than seven years before death, or one you keep benefiting from, may still count.
- Forgetting the pension change. The April 2027 rules could change your strategy.
- Overlooking the business and farm changes. The £2.5 million cap applies from April 2026.
- Not planning for liquidity. Illiquid estates, such as a home or a farm, can force a rushed sale.
- Not having a will. Without one, your assets pass under the rules of intestacy and may not use your allowances.
Do you need a solicitor or financial adviser?
You can handle simple steps yourself, such as using your annual gift exemption. For anything involving trusts, business or farm relief, large gifts or pensions, speak to a regulated solicitor or financial adviser. Look for a solicitor regulated by the SRA (or the Law Society of Scotland) or a member of STEP, and check any adviser on the Financial Conduct Authority register.
Key takeaways
- You can legally avoid or reduce inheritance tax by using exemptions, reliefs and allowances. Evasion is a crime.
- IHT is 40% above £325,000, with up to £175,000 extra for a home passed to direct descendants, and up to £1 million for a couple.
- Thresholds are frozen until April 2031.
- Anything left to a spouse or civil partner is generally exempt, and unused allowances transfer to the survivor.
- Gifts leave your estate immediately if exempt, or after seven years if they are larger gifts, with taper relief in between for gifts above the nil-rate band.
- Leave at least 10% of your net estate to charity to cut the rate on the rest from 40% to 36%.
- Write life insurance in trust so the payout does not increase the tax.
- From April 2026, business and agricultural relief is capped at £2.5 million at 100%. From April 2027, most pensions will count towards your estate.
- Tax is due six months after the end of the month of death.
- Take regulated advice before using trusts, large gifts or business reliefs.
If you give away assets and survive seven years, the gift is free of inheritance tax. If you die within seven years, tax may be due on a sliding scale called taper relief.
Each person has a £325,000 nil-rate band, plus up to £175,000 if the home passes to direct descendants. A couple can pass on up to £1 million.
You can, but if you carry on living in it without paying full market rent, it is treated as a gift with reservation and still counts as part of your estate. Take advice first because other tax charges can apply.
No. Inheritance tax is normally paid from the estate of the person who died, usually by the executor, before the assets are shared out.
Yes. Inheritance tax is a UK tax run by HMRC, although the process for dealing with an estate in Scotland (confirmation) differs from probate in England and Wales.
Most unused pension funds and pension death benefits will count towards your estate from 6 April 2027. Death-in-service benefits from a registered scheme are excluded.
