Ways to legally reduce Inheritance Tax
Understand how 'gifting' can help to cut the costs
While the vast majority of people don't pay Inheritance Tax, if yours is one of the roughly 5% of estates that will pay it then there are ways to plan ahead to legally reduce the bill. This guide talks through how you can use 'gifting' as a way to pass on some of your money while you're still alive – and the rules you need to know
With thanks to Dr Robin Keyte for sense-checking this guide.
How Inheritance Tax works, plus rules on gifting and more
In his spin-off BBC Not The Martin Lewis Podcast, Martin explains the main Inheritance Tax and gifting rules and puts your questions on trusts and probate to a team of specialists.
Listen to 'Inheritance Tax' for free via:
BBC Sounds | Apple | Spotify
A minority of estates pay Inheritance Tax – will you?
Inheritance Tax (IHT) is the tax on the 'estate' of someone who has died. But in reality, very few estates have to pay it – in fact, only around 5% of estates actually end up paying IHT.
Your estate will include any assets you have when you die. This will include things like property, savings, investments, businesses, vehicles, payouts from life insurance policies and so on, minus any debts.
However, everyone has a basic allowance of £325,000 that's free from IHT, which increases to £500,000 if you're passing on your home to a child or grandchild. So if your estate is worth less than this, there won't be any IHT to pay. Anything above these allowances will generally be taxed at an IHT rate of 40%.
Separately, anything you leave to a spouse (husband, wife, civil partner) is free of IHT. And as you can inherit your spouse's unused IHT allowance, for married/civil-partnered couples it's possible to have an allowance of up to £1 million that's free from IHT. Do note, these extra perks do NOT apply to couples who aren't married or in a civil partnership.
Our main Inheritance Tax guide explains exactly how it works.
If after all of this your estate is still big enough that you're likely to pay IHT, gifting rules allow you to pass on specific amounts of money while you are still alive that will be outside your estate (meaning they won't be impacted by IHT) – we talk you through the options below.
For guidance on what to include when working out the value of someone's estate, there's a handy list on Gov.uk (it also has a calculator that can give you an approximate total value.)
Likely to pay Inheritance Tax? Gifting can cut the bill
If you're likely to pay IHT, there are ways to legally reduce the bill.
It involves giving away money – or 'gifts' – while you're alive. This can reduce the total value of your estate, meaning IHT is charged on a smaller amount of it (which in turn reduces any IHT bill).
Where you're planning on making gifts during your lifetime, you should familiarise yourself with what the rules are. To do this, we've separated gifting into two distinct categories:
Annual gift allowance: how much you can 'gift' each year without worrying about IHT.
Gifts subject to the seven-year-rule: 'gifts' that could count for IHT purposes if you die within seven years of giving them.
Before we go any further though, it's worth clarifying the following:
A gift must be a genuine, unconditional gift that you will not gain from. It's something given to someone without any reservation: no nods, winks or mutual backscratching.
So while gifts can be a valid way to reduce your IHT bill, if given conditionally (barring a wedding gift), with the intention of getting something in return, gifts may still be liable for IHT.
For example, the biggest asset most people have is their home. Yet giving it to your children won't work if you continue to live in it (unless you pay market rent to them for it).
See Gov.uk for more information on what exactly constitutes a gift.
Gifting 1. Your annual, tax-free gift allowance
Each tax year, you are able to give away a certain amount of money or possessions tax free – your annual, tax-free gift allowance. Gifts that fall into this category aren't affected by IHT.
Gifts that are part of your annual allowance are separate to gifts subject to the seven-year rule. In other words, annual gifting is in addition to any gifting you do that's subject to the seven-year rule.
Full info about your annual gift allowance is on Gov.uk, but in brief here's how it works:
What's a tax year?
In the UK, the tax year runs from 6 April to 5 April of the following year. So the 2026/27 tax year will run until 5 April 2027, while the 2027/28 tax year will begin on 6 April 2027.
Allowance 1: Give away £3,000 ('annual exemption')
The first £3,000 you give away each tax year is not subject to IHT.
If you don't use your full annual exemption in any given year, the remainder can be carried forward to the next tax year (but no further). For example, if you didn't use any of your annual exemption in 2025-26, you could carry over that tax year's allowance and give away a total of £6,000 tax-free in 2026-27 (so £3,000 from 2025-26 and £3,000 from 2026-27).
The annual exemption can be used entirely on one person or split between multiple people (for example, you might give £1,000 each to three different people).
Allowance 2: Give £250 to anybody/everybody you know
Gifts of up to £250 per person each year are not subject to IHT. So, let's say you have 12 grandchildren, you could gift each of them £250 a year as a birthday present.
These gifts are separate to the £3,000 annual gift exemption (described above) – though you can't combine gifts on the same person. So if you have already gifted someone your £3,000 annual exemption, you couldn't then gift them £250.
Allowance 3: Give wedding gifts (up to a limit)
If a family member or friend is getting married, you're able to gift them money tax free. You can only make a wedding gift to that person once a year, and there's a limit on how much you can give them: £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else.
You can make wedding gifts to different people in the same tax year. For example, if you have two children, both who are getting married in the same tax year, you could give each of them up to £5,000 (so up to £10,000 in total). Or if you had multiple friends getting married in the same tax year, you could give each of them up to £1,000.
Wedding gifts can be combined with your £3,000 annual exemption (so both can be used on the same person in the same tax year) but not with the £250 small gift allowance.
Allowance 4: Give money freely from your income (as long as it doesn't affect your lifestyle)
IHT is a tax on your assets. And as a regular income (such as that from earnings, pensions and dividends) is not treated as an asset, you can regularly give money away from this income – tax free – so long as doing this isn't detrimental to your lifestyle.
There's no limit on how much money you can give away tax free, so long as:
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You pay from your regular monthly income.
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You can afford the payments after meeting your usual living costs.
Reasons for giving money from your regular income can include (though isn't limited to):
- Paying rent for your child.
- Paying into a savings account for a child under 18 (see junior ISAs and Premium Bonds).
- Giving financial support to an elderly relative.
- Contributing to your child's living costs and tuition fees at university.
Giving money away like this can be combined with your £3,000 annual exemption (so it can be used on the same person), but not with the £250 small gift allowance.
Importantly, any money given from your regular income must follow an established pattern – for example, regularly paying the rent of a grandchild – and it can't compromise your own living standards. The rules for this type of IHT exemption are complex, so if you plan to give money in this way, it's a good idea to get independent financial advice.
Quick question:
How much can I give away from my regular income?
Making regular gifts from your income is only tax free if it doesn't impact your own standard of living (so should only be made from your 'surplus' income).
To identify surplus income, calculate all the income you receive in one year and minus all expenses (mortgage, bills, vehicle costs, insurance, etc). If there's anything left over, that can be considered your surplus income. That surplus income is the maximum from which you could give away regularly tax free.
Write down the calculations you've used to determine your surplus income and keep the evidence – that'll make it easier for the executors of your estate when they tell HMRC that this type of gifting came out of your surplus income. Do the calculations each year and keep the evidence, as surplus income may change.
To get a flavour of what you should document, see page 8 of this IHT403 form.
Remember, for this type of gifting to be tax free, you also need to have the intention of doing it regularly (so ideally, at least once a year).
Allowance 5: Give to charities without limit
Donations or gifts to charity are exempt from IHT. And where you give the equivalent of at least 10% of your estate to charity, the rate of IHT you pay is reduced to 36%.
A charity donation could be a fixed amount of money (for example, £50,000), items (like an antique or something valuable), or other types of gift.
Let's say your estate is worth £750,000. If everything, including your home, passes to your children, the first £500,000 will be inherited tax free. The £250,000 above that will be subject to IHT at a rate of 40% – so that's £100,000 your estate would pay in IHT.
But if you gifted £75,000 of your estate to charity, only £175,000 of your estate would be subject to IHT, at a reduced 36% rate – meaning you'd pay £63,000 in IHT (£37,000 less).
Gifting 2. Gifts subject to the 'seven-year rule'
Separate to your annual gift allowance, the other way of using gifting to reduce your IHT bill is through the 'seven-year rule'.
Seven-year rule gifting can be used in combination with your annual gift allowance. So taking advantage of one doesn't mean you then can't use the other (and your annual gifting allowance won't reduce if you're using seven-year gifting at the same time).
In simple terms, the seven-year rule works like this:
Gifts given more than SEVEN YEARS before your death ARE NOT liable for IHT
In other words, if you make a gift during your lifetime and then live for another seven years or more, then this gift won't count towards your £325,000 IHT-free allowance.
But gifts given in the seven years prior to your death will count towards this allowance.
IMPORTANT: This chapter on the seven-year rule does not relate to trusts, where the IHT rules are much more complicated. If a trust is relevant to you, it's best to seek financial advice.
How the seven-year rule works
IHT is due on gifts given away less than seven years before you die if the following apply:
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The gifts aren't part of your annual gift allowance.
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The gifts are worth more than £325,000 (your IHT-free allowance).
If IHT is due, it will be charged on the portion of the gifts that is above £325,000, on a sliding scale between 40% and 8% based on how long ago the gift was given. The table explains:
Years between gift and death | Rate of Inheritance Tax |
|---|---|
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 | 0% |
Here's an example of how it works in practice:
Sally Saver dies in 2026. She wasn't married or in a civil partnership. In the nine years before she died, Sally gave away three significant sums of money:
£50,000 to her brother in 2017 (nine years ago).
£325,000 to her sister in 2022 (four years ago).
£100,000 to a friend in 2023 (three years ago).
There's no IHT to pay on the £50,000 gifted to her brother, as it was given more than seven years ago. Likewise, there isn't any to pay on the £325,000 she gave to her sister, as this is covered by the IHT-free allowance.
But her friend (not the estate) must pay IHT on the £100,000 given to them, at a rate of 32% (so £32,000), as this was given by Sally after she'd breached the IHT threshold.
At the time of her death, Sally's remaining estate was valued at £400,000. As there is no IHT-free allowance left to use (it all went on the gifts), IHT on the remaining estate would be due at 40%. This would be equivalent to £160,000.
Important. If you make a gift which isn't money – like property, shares, investments – in the seven years before you die you may pay Capital Gains Tax as well as IHT. So, before making any non-monetary gifts, seek sound financial advice first.
Who has to pay the IHT due on a gift?
Normally IHT is deducted from the estate and paid to HMRC before the rest passes to the deceased's beneficiaries. This process is sorted out by the estate's executor/administrator.
But where IHT is due on a gift specifically, then it's the person given the gift who pays the IHT. You may need to liaise with the estate executor/administrator to work out what's due.
Be aware that IHT needs paying by the end of the sixth month after the deceased died. So if they died in January, IHT would need to be paid by the end of July.
More information about when IHT is due and how to pay it can be found on Gov.uk.
You can no longer use a pension to reduce IHT
If you've got a pension, then often this can be passed on if there's money left in the pot at the time you die.
However, the rules around pensions and IHT are changing.
Currently, unspent pensions do not form part of your estate when you die, meaning they're not normally subject to IHT. But, from 6 April 2027, unspent pensions will start to form part of your estate – meaning they will be subject to IHT.
In practice, this means you'll no longer be able to use a pension to transfer wealth tax free. Though in reality, only a small number of pensions will actually be hit with IHT as a result of this change (the number is estimated to be in the 10,000s). The vast majority of pensions will continue to be unaffected by IHT, and many will continue to be inherited tax free.
Importantly, it will remain the case that you may not pay income tax if you inherit a pension, so for some people inheriting a pension will stay completely tax free.
For more on how passing on a pension works, see our guide on Inheriting a pension.
Will putting my assets in a trust reduce IHT?
Trusts are a very complex area of IHT planning, so we'll only cover them here briefly.
Placing your assets into a trust can remove them from your estate for IHT purposes – but this isn't automatic. IHT is often still required to be paid somewhere down the line, plus you may have to pay other types of tax too – so don't just assume trusts equate to no tax.
What's more, there are different types of trusts, each subject to its own rules, including IHT.
See Gov.uk for more on the types of trust available and reasons for setting one up. And if you're considering opening a trust, it's essential to get independent financial advice.
What is a Property Protection Trust?
A Property Protection Trust is a type of trust that is usually written into your will, designed to help protect your share of the family home. Depending on how it's set up, it can:
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Ensure a share of your home passes to your children, while...
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Allowing a surviving partner/spouse to stay in the property and retain their own share.
If your share is held in trust it may not be counted as part of your partner's assets if they later go into care, which could protect it from being used to fund care home fees.
BUT this is far from guaranteed. Local councils can treat this as 'deliberate deprivation of assets', especially if they believe the trust was set up primarily to avoid care costs.
If a council decides you deliberately gave away your property to avoid care home fees, the council may treat your share as if your spouse still owns it when working out how much they should pay for care. And there is no fixed time limit – councils can investigate even if the trust was set up five, 10 or 15 years ago.
For more information on how it works, see this article from the Society of Will Writers.
Life insurance can be placed in a trust
If you've got a life insurance policy this will count towards the value of your estate when you die. This means you will end up paying IHT on the policy if your estate is already above the IHT threshold or if the value of the policy pushes your estate above the threshold.
However, life insurance polices that are placed into a trust sit separately to your estate. This means life insurance policies that are held 'in trust' are not counted for IHT purposes.
As a result of it being outside your estate, a life insurance policy in trust can also mean:
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Money from the policy goes exactly towards what it's intended for (like clearing a mortgage). In other words, you won't have to worry about the life insurance payout being smaller as a result of IHT and your loved ones then struggling to clear debts.
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You control who benefits from the life insurance policy. Depending on the type of trust, the trustees will be obliged to ensure your chosen beneficiaries get the proceeds.
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You'll get the money quicker. Money from a life insurance policy that's in trust can normally be paid out quicker than the rest of your estate as there is no need for probate.
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Depending on how the money is paid to the beneficiaries, this could reduce the value of their own estate. For example, if the money from the policy is paid out as an interest-free loan from the trust, the proceeds of the policy would not then count as part of your beneficiaries' estates (which may reduce their own IHT-liability).
As there are different types of trust available, the right one will depend on your personal circumstances. Also bear in mind that once in trust, a policy is no longer legally yours, so making changes to it can be hard unless the trustees agree.
In each case, it would be essential to get independent financial advice.
Inheritance tax and gifting FAQs
Is there insurance which can cover Inheritance Tax?
There are insurance policies which provide cover in the event someone you give a gift to has to pay IHT on it (in other words, if you die within seven years of making the gift) – such as 'gift inter vivos', whole of life assurance, and guaranteed premium level term assurance.
However, policies should be arranged in a way that it doesn't inflate the value of your estate (which may mean paying more IHT).
This is a very complex area, so you should speak to a financial advisor.
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