Five ways to reduce a future inheritance tax bill

Inheritance Tax is one of the few taxes where planning ahead genuinely changes the outcome. With time and good advice, families can pass on more of what they have built, using the allowances and reliefs Parliament intended. Here are five places to start.

1. Use every allowance you are due

Everyone has a nil-rate band, an amount that passes free of Inheritance Tax, and many estates also qualify for a residence nil-rate band where the family home passes to children or grandchildren. Married couples and civil partners can pass unused allowances to each other. Making sure your estate captures every band available is often the single biggest step, and it costs nothing.

2. Make gifts, and make them early

You can give a set amount away each year that leaves your estate straight away, and larger gifts usually fall outside your estate once you have survived them by seven years. The sooner gifts are made and properly recorded, the more effective they are. The skill is giving without affecting your own security, which is what good planning protects.

3. Consider trusts where they fit

Putting some cash, investments or property into a trust can move it out of your estate for Inheritance Tax, while letting you keep a say in how it is eventually used. The important limit is that you cannot carry on benefiting from what you have given away; if you do, it is treated as never having left your estate at all. Trusts also carry tax charges of their own, and the rules are detailed, so they should always be arranged alongside a solicitor.

4. Cover what remains with life insurance

Where a bill will remain however much you plan, a life policy written in trust can provide the money to pay it. Because it is in trust, the payout normally falls outside your estate and reaches your family quickly, so they are not forced to sell the family home to settle a tax demand.

5. Keep your plans and your Will up to date

Allowances change and families grow. A plan that was right five years ago can drift out of date, and pension nominations in particular are often forgotten. A regular review keeps everything in line with your wishes and the current rules.

One change is worth planning for now. Pensions have long sat outside the estate for Inheritance Tax, which made them a valuable way to pass wealth on, and from April 2027 unused pension funds are due to be brought within it. For anyone who had intended to leave a pension untouched and hand it down, that changes the arithmetic, and it is worth revisiting before the new treatment takes effect rather than after.

Inheritance Tax planning rewards those who start early. If you would like to understand your own position, we would be glad to help, working alongside your solicitor and accountant.