IHT Planning Basics

Key facts

Effective IHT planning starts with understanding your estate value and the available nil-rate bands.
Making lifetime gifts using the annual exemption (£3,000) and other allowances is one of the simplest strategies.
The 7-year rule means outright gifts become fully exempt if you survive 7 years.
Leaving 10%+ of the net estate to charity reduces the IHT rate from 40% to 36%.
Writing life insurance in trust ensures the payout falls outside the estate.

Why Plan for IHT?

Inheritance Tax is charged at 40% on the taxable estate above the nil-rate band. Without planning, a significant portion of your estate could go to HMRC rather than your chosen beneficiaries. IHT planning aims to reduce this liability using legitimate exemptions and reliefs provided by law.^[1]

The key principle is straightforward: reduce the value of your estate for IHT purposes, or ensure that your estate qualifies for the maximum available reliefs and exemptions.

Core IHT Planning Strategies

1. Maximise Lifetime Gifts

Giving assets away during your lifetime is one of the most effective ways to reduce your estate:^[2]

Use the £3,000 annual exemption every year (carry forward one unused year)
Make small gifts of up to £250 per recipient
Use wedding/civil partnership gift exemptions (£5,000 from parents, £2,500 from grandparents, £1,000 from others)
Make gifts from normal expenditure out of income (potentially unlimited)
Make larger outright gifts that become exempt after 7 years (PETs)

2. Use Both Nil-Rate Bands

Ensure your will is structured to take advantage of:

The standard NRB (£325,000 per person)
The transferable NRB from a predeceased spouse (up to £650,000 combined)
The residence nil-rate band (£175,000 per person, up to £350,000 for a couple)

3. Leave a Charitable Legacy

Leaving at least 10% of the net estate to charity reduces the IHT rate from 40% to 36%. The saving can sometimes mean the family receives more than if nothing was left to charity.^[1]

Key point: The combined NRB and RNRB for a married couple can provide a tax-free threshold of up to £1,000,000. Ensuring your will is structured correctly to claim these allowances is often the single most valuable IHT planning step.

Further Planning Opportunities

Strategy	How It Works	Potential Saving
Life insurance in trust	Policy proceeds fall outside the estate	40% of the policy payout
Discretionary trust planning	Assets removed from estate (subject to trust charges)	Net saving after trust charges
Business Property Relief	50% or 100% relief on qualifying business assets	Up to 100% of business value
Agricultural Property Relief	50% or 100% relief on qualifying farmland	Up to 100% of agricultural value
Gifts from income	Regular surplus income given away is exempt	Potentially unlimited
Pension planning	Pensions pass outside the estate (until April 2026)	40% of pension fund

Gifts with Reservation of Benefit

A critical anti-avoidance rule: if you give away an asset but continue to benefit from it, the gift is ineffective for IHT purposes. The asset remains in your estate as if the gift had never been made.^[3]

Common examples:

Giving your home to your children but continuing to live in it rent-free
Giving away investments but continuing to receive the income
Giving away a painting but keeping it on your wall

The pre-owned assets tax (POAT): Even if a gift with reservation does not apply, HMRC may charge income tax on the benefit you receive from assets you have given away. This “pre-owned assets” charge is a further anti-avoidance measure. Professional advice is essential for any planning involving assets you wish to continue using.

April 2026 Pension Changes

From April 2026, unused defined contribution pension funds and death benefits will be brought within the scope of IHT. This is a significant change — pensions have traditionally been a powerful IHT planning tool because they passed outside the estate. After April 2026, spending other assets first and preserving pension wealth will no longer provide an IHT advantage.

Frequently Asked Questions

When should I start IHT planning?

The sooner the better. Many IHT planning strategies (especially lifetime gifts) rely on the 7-year rule, so starting early gives your gifts time to become fully exempt. However, it is never too late to make some improvements — even will-based planning can significantly reduce IHT.

Do I need professional advice for IHT planning?

For straightforward estates, basic strategies like using annual exemptions and ensuring a tax-efficient will can be implemented with general guidance. For larger or more complex estates involving trusts, business assets, or overseas property, professional advice from a qualified solicitor or tax adviser is strongly recommended.

What is the most effective IHT planning strategy?

There is no single “best” strategy — it depends on your circumstances. Common effective approaches include: maximising lifetime gifts, using both NRBs and RNRBs through will planning, writing life insurance in trust, leaving a charitable legacy for the 36% rate, and claiming BPR/APR where available.

Can I give away my home to avoid IHT?

You can give away your home, but if you continue to live in it (or benefit from it), the “gift with reservation of benefit” rules mean it remains in your estate for IHT. To be effective, you must genuinely give up all benefit — which often means moving out and paying a market rent if you stay.

Sources

How Inheritance Tax works: thresholds, rules and allowances — GOV.UK
Inheritance Tax: gifts — GOV.UK
IHTM14000 – Lifetime transfers — HMRC