Inheritance tax planning is the legal use of allowances, gifts, exemptions and reliefs to reduce the tax due on your estate. In England and Wales inheritance tax is charged at 40% on the value of an estate above the available tax-free thresholds, so planning works by using those thresholds in full and moving value outside the taxable estate in ways HM Revenue and Customs allows.
This guide covers the thresholds every plan starts from and the strategies people use most, plus two figures many guides still get wrong: the threshold freeze now runs to April 2031, and business and agricultural relief becomes a £2,500,000 allowance a couple can combine to £5,000,000. Figures describe the law of England and Wales and are subject to change.
What is inheritance tax planning?
Inheritance tax planning is arranging your estate, in your lifetime and in your will, so less of it is lost to the 40% charge. It uses tools the law provides: the nil-rate bands, the spouse and civil partner exemption, tax-free gifts, trusts, and reliefs for business, farm and charitable assets. The aim is to pass more to the people and causes you choose, within the rules.
How much can you pass on before inheritance tax is due?
Most people can pass on £325,000 free of inheritance tax, and a further £175,000 where a home is left to children or grandchildren, so a single person leaving a home can often reach £500,000 and a couple up to £1,000,000. Anything left to a spouse or civil partner is exempt, and unused allowances pass to the survivor. Tax at 40% applies only to value above the bands that are available.
| Allowance | Amount | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 per person | Frozen until 5 April 2031. |
| Residence nil-rate band (RNRB) | Up to £175,000 per person | Only where a home passes to direct descendants; frozen until 5 April 2031. |
| Single person with a home to descendants | Up to £500,000 | £325,000 plus £175,000. |
| Married couple or civil partners | Up to £1,000,000 | Both bands are transferable to the survivor. |
| Standard rate above the bands | 40% | Reduced to 36% if at least 10% of the net estate goes to charity. |
| RNRB taper | Withdrawn £1 for every £2 | Where the estate is worth more than £2,000,000. |
Source: gov.uk, Inheritance Tax and the freeze extension announced at Budget 2025 on 26 November 2025, as at August 2026, subject to change.
The freeze was extended a further year at the Budget on 26 November 2025 and now runs to 5 April 2031, not the 2029 to 2030 date many guides still quote. See our inheritance tax overview for more.
What are the main inheritance tax planning strategies?
The main strategies are using both nil-rate bands in full, leaving assets between spouses, making tax-free lifetime gifts, using trusts, claiming business or agricultural relief, and giving to charity. Most estates combine several rather than relying on one. The table below maps the common tools; the right mix depends on your assets, your health and your family.
| Strategy | How it reduces the bill | Who it tends to suit |
|---|---|---|
| Use both nil-rate bands | Leave a home to descendants so the residence band applies; pass unused bands to a surviving spouse. | Homeowning couples and widowed people. |
| Spouse and civil partner exemption | Transfers between spouses are exempt, deferring tax to the second death. | Married couples and civil partners. |
| Lifetime gifts | Move value outside the estate using annual exemptions and the seven-year rule. | Those with more than they need and time on their side. |
| Trusts | Move assets outside the estate while keeping some control over their use. | Estates with children or vulnerable beneficiaries. |
| Business and agricultural relief | Reduces the taxable value of qualifying business or farm assets. | Business owners, farmers and some shareholders. |
| Charitable giving | Gifts to charity are exempt; 10% or more cuts the rate on the rest to 36%. | Those with causes they want to support. |
How do lifetime gifts reduce inheritance tax?
Lifetime gifts reduce inheritance tax by moving value out of your estate, either through set exemptions that are tax-free straight away, or through larger gifts that fall outside the estate once you survive seven years. Some exemptions renew each year, so gifting steadily is often more effective than one large transfer late in life.
| Exemption | Limit | Notes |
|---|---|---|
| Annual exemption | £3,000 per tax year | Can carry forward one unused year, giving up to £6,000. |
| Small gifts | £250 per person | To any number of people, if no other exemption is used for that person. |
| Wedding or civil partnership gifts | £5,000 to a child; £2,500 to a grandchild or great-grandchild; £1,000 to anyone else | Given on or shortly before the ceremony. |
| Normal expenditure out of income | No fixed limit | Regular gifts from surplus income that do not affect your standard of living. |
| Gifts to a spouse or civil partner | Unlimited | Exempt, provided they are UK domiciled or treated as long-term resident. |
Source: gov.uk, Inheritance Tax gifts, as at August 2026, subject to change.
Larger gifts not covered by an exemption are potentially exempt transfers: they leave your estate completely if you live seven years, but are added back if you die sooner and may use up your nil-rate band. The normal expenditure out of income exemption is one of the most useful and least used, because regular gifts from genuine surplus income are exempt with no seven-year wait.
What people get wrong about taper relief
Taper relief is widely misunderstood. It reduces the tax due on a gift made three to seven years before death, not the value of the gift, and it only helps where your gifts in those seven years exceed the £325,000 nil-rate band. Below that level the band covers the gifts, there is no tax to taper, and surviving four or five years makes no difference to the bill.
| Years between gift and death | Tax rate on the taxable part of the gift |
|---|---|
| Less than 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% |
Source: gov.uk, Inheritance Tax gifts, as at August 2026, subject to change.
So a £200,000 gift on its own, with no other large gifts, carries no tax whether death follows in year two or year six, because there is nothing for taper to reduce. Taper only bites once cumulative gifts pass £325,000. Reading the table as though the gift itself shrinks year by year is the mistake we see most often, and it leads people to expect a saving that is not there.
A worked example: how the residence band and taper interact
This example shows how the thresholds and the residence band taper work together. Margaret is a widow; her husband left her everything, so she has both of her own bands and both of his. Her estate is worth £2,200,000, including a home she leaves to her daughter. The figures are illustrative and rounded, and every estate differs.
- Nil-rate bands: her own £325,000 plus her late husband's transferred £325,000, a total of £650,000.
- Residence bands: her own £175,000 plus his transferred £175,000, a total of £350,000, because a home passes to a direct descendant.
- Residence band taper: the £2,200,000 estate is £200,000 over the £2,000,000 limit, so the residence band is cut by £1 for every £2 over, that is £100,000, leaving £250,000.
- Total allowances: £650,000 of nil-rate band plus £250,000 of tapered residence band gives £900,000 tax-free.
- Taxable estate: £2,200,000 less £900,000 leaves £1,300,000.
- Tax due: at 40%, that is £520,000.
The example shows why the £2,000,000 line matters. Bringing the estate below it, through lifetime gifts or business relief, could restore the full residence band and save tens of thousands of pounds, an interaction tailored estate planning looks for.
How do trusts, charity and life insurance fit in?
Trusts, charitable gifts and life insurance sit alongside gifting. A trust can move assets outside your estate while you keep some control over their use. Charitable gifts are exempt and can lower the rate on the rest. Life insurance written in trust provides money to pay a bill without adding to it. Each has rules and costs, so they suit some estates and not others.
Putting more than the nil-rate band into most trusts can trigger an immediate 20% entry charge, with further charges every ten years, so trusts are more often used to provide for a child, a disabled beneficiary or a second family than to avoid tax. Leaving at least 10% of the net estate to charity cuts the rate on the rest from 40% to 36%. Life insurance written in trust pays out outside the estate, giving your family cash to settle the bill. Advice from a solicitor or STEP practitioner is sensible before creating a trust.
What 2026 and 2027 changes should you plan around?
Two coming changes reshape planning for business owners, farmers and anyone with a pension. From 6 April 2026, business and agricultural relief is capped at 100% on the first £2,500,000 of qualifying assets, with 50% above that. From 6 April 2027, unused pension funds are brought into the estate for inheritance tax. Both were confirmed in late 2025, and both change advice that was sound only a year ago.
| Change | From | What it means |
|---|---|---|
| Business and agricultural relief cap | 6 April 2026 | 100% relief on the first £2,500,000 of qualifying assets per person, 50% above; transferable, so a couple can reach £5,000,000. Replaced the previous unlimited 100% relief. |
| Pensions within inheritance tax | 6 April 2027 | Unused pension funds, which have often passed free of tax, are brought into the taxable estate. |
| Threshold freeze extended | To 5 April 2031 | Nil-rate band, residence band and £2,000,000 taper line stay fixed a further year, so rising values pull more estates into tax. |
Source: gov.uk, reforms to agricultural and business property relief, announced 23 December 2025, and Budget 2025 on 26 November 2025, as at August 2026, subject to change.
The £2,500,000 relief allowance is transferable, so a farming or business-owning couple may shelter up to £5,000,000. If you own a company or a farm, value that once passed with full relief may now be partly taxable, worth modelling before it takes effect.
How does planning fit with your will, power of attorney and care?
Inheritance tax planning only works if the rest of your estate planning supports it. A will secures the residence nil-rate band by leaving a home to descendants, a lasting power of attorney lets someone act if you lose capacity, and planning for the impact of care fees runs alongside, because money spent on care leaves the estate first. Set each in place so the tax plan holds.
- Make a will so the residence nil-rate band is secured and gifts, trusts and charitable wishes are clear; without one, the intestacy rules can waste that band. See how to write your will.
- Record a gifting plan while you still have capacity, because attorneys under a lasting power of attorney (£92 to register with the Office of the Public Guardian, gov.uk, subject to change) can usually make only limited gifts.
- Plan for the impact of care fees separately; our guide on care home fees covers why moving assets purely to limit care contributions can be treated as deliberate deprivation.
When should you start, and do you need a solicitor?
The best time to start inheritance tax planning is once your estate is likely to exceed the thresholds, which for many homeowners is earlier than they expect. Time is the main asset, because the seven-year rule and regular gifting both reward starting early. You do not always need a solicitor, but larger estates, trusts and business assets usually benefit from qualified advice.
- Value your estate, including the home, savings, investments, pensions from 6 April 2027, and any business or farm assets.
- Check which allowances you and a spouse already have, including any transferred from a late partner.
- Identify the gap between your estate and the tax-free thresholds, and the likely 40% exposure above them.
- Decide which tools fit, from steady gifting and charitable legacies to trusts or relief on business assets.
- Put a will and a lasting power of attorney in place so the plan holds, and review it when the law or your circumstances change.
Fairchild Oldfield are estate planning specialists and will writers, not solicitors. Where an estate needs legal or regulated financial advice, we say so. See how we work on our pricing page or book a consultation.
Frequently asked questions
These are the questions we are asked most about inheritance tax planning. Each answer reflects the law of England and Wales, current to the November 2025 Budget, and describes general rules rather than advice on your own estate. Thresholds are frozen until 5 April 2031, so figures that look settled today may still change at a future Budget.
How much can you pass on before inheritance tax is due?
Most people can pass on £325,000 free of inheritance tax, the nil-rate band, plus up to £175,000 where a home is left to children or grandchildren, the residence nil-rate band. A single person leaving a home can often reach £500,000, and a couple up to £1,000,000, because unused allowances transfer to the survivor. Value above the available bands is taxed at 40%, and both bands are frozen until 5 April 2031 (gov.uk, as at August 2026, subject to change).
What is the seven-year rule on gifts?
The seven-year rule means most gifts leave your estate for inheritance tax if you live seven years after making them; these are potentially exempt transfers. Die within seven years and the gift is added back and may use up your nil-rate band. Where total gifts exceed the £325,000 nil-rate band, taper relief reduces the tax on the excess for gifts made three to seven years before death (gov.uk, as at August 2026, subject to change). Taper reduces the tax, not the gift.
Does putting money in a trust avoid inheritance tax?
Not automatically. A trust can move assets outside your estate, but putting more than the nil-rate band into most trusts can trigger an immediate 20% entry charge, with further charges every ten years, so trusts are not a simple way to avoid tax. They are more often used for control and protection, such as providing for a child or a vulnerable beneficiary. Advice from a solicitor or STEP practitioner is sensible before creating one.
What is happening to pensions and inheritance tax from April 2027?
From 6 April 2027, unused pension funds are brought into the estate for inheritance tax. Pensions have often passed free of inheritance tax, so this is a significant change for anyone using a pension to pass on wealth. If your plan relies on leaving a pension pot untouched, review your position and the order in which you draw on different assets (gov.uk, as at August 2026, subject to change).