There will be some changes to the way inheritance tax works in April 2027. Experts reveal the way you can cut your bill now
With inheritance tax (IHT) receipts set to continue rising since the Budget, more estates than ever are being caught in the net.
Frozen thresholds, alongside last year’s decision to bring unused pension pots into IHT, mean families who never expected to pay the levy now face mounting bills.
The nil-rate band remains stuck at £325,000 despite inflation and surging asset prices, while from April 2027, most unused pension funds and death benefits will be treated as part of an individual’s estate and taxed accordingly.
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Revenues from IHT are forecast to hit around £9.1bn in 2025/26, with the pension changes alone expected to raise an extra £1.34bn a year for the Treasury, according to official figures.
Here, we outline some of the little-known rules, reliefs, and strategies that can help families reduce what they owe.
How inheritance tax works
The nil‑rate band of £325,000 and the residence nil‑rate band of £175,000 will remain frozen until at least 5 April, 2031 – a move expected to raise a record £14.5bn.
Your estate becomes liable for IHT if it exceeds the nil-rate band. HMRC typically expects payment by the end of the sixth month after death.
To calculate the amount payable, an advisor or your family will have to add up all your assets, subtract the nil-rate band and the residential nil-rate band if applicable, and pay up to 40 per cent on the remainder.
The residential nil-rate band increases the threshold to a joint £1m for couples who own a property and leave it to their direct descendants.
But this allowance begins tapering once an estate exceeds £2m and is completely removed at £2.3m.
The freeze on IHT thresholds and other policy changes means the number of families liable for the tax is set to double by 2031.
By the start of the next decade, 9.3 per cent of all deaths will be subject to IHT.
The extension of the freeze on thresholds is expected to raise a record £14.5bn, pushing the number of estates liable to 63,100 in 2029/30, up from 32,200 this year.
Steps to limit inheritance tax
Start early and plan ahead
IHT planning is increasingly relevant as more families fall into the tax net with experts warning people to be aware their estate could be affected – even if they don’t think their estate is big enough.
Craig Rickman, personal finance editor at interactive investor, warned that “many families want to pass on wealth during their lifetime, but the rules around IHT can catch people out – particularly when it comes to gifts made in the final years of life.”
One rule to be aware of is the seven-year rule which says gifts made within seven years of death may still be taxed. If someone lives longer than this after gifting, there is no tax left to pay.
Rickman also noted that the UK’s move to a residence-based IHT system means long-term residents could be liable on worldwide assets, including overseas property and foreign investments.
Under this system, non-UK assets will be within the scope of IHT if an individual qualifies as a long-term resident.
Make the most of annual gift allowances
Using the exemptions available each year can steadily reduce the size of your estate.
Rickman pointed out that every tax year you can gift up to £3,000, the annual exemption, without triggering an IHT charge.
Couples can combine allowances to give £6,000 tax-free each year, or even £12,000 if last year’s allowance was unused.
Extra allowances apply for wedding gifts, with parents able to gift £5,000 to a child and grandparents able to give £2,500 to a grandchild.
Small gifts of up to £250 per person are also exempt. Rickman explained: “Gifting £250 to six people annually means passing on £30,000 over 20 years – completely free of IHT.”
Gift from surplus income
Gifting from surplus income is an effective but often overlooked strategy.
If you have income left over after covering your living costs, you can give that money away immediately without it being counted as part of your estate – and these gifts aren’t affected by the seven-year rule.
The key is meeting the qualifying conditions: the gifts must come from income, follow a regular pattern, and leave you enough income to maintain your usual standard of living.
Consider charitable giving
Charitable donations reduce IHT while supporting causes you care about.
Gifts to UK-registered charities are completely exempt, and if at least 10 per cent of your estate is left to charity, the IHT rate on the remainder falls from 40 per cent to 36 per cent.
Rickman noted that for larger estates, this reduction alone can “save families tens of thousands of pounds.”
Plan for family structure and spousal transfers
Careful planning is especially important in blended families or where children from previous relationships are involved.
Rickman said: “While transfers between spouses and civil partners are exempt from IHT, wills need to be explicit about who should ultimately inherit – especially where stepchildren are involved.”
He added: “Without clear instructions, assets may not be distributed as you intend, potentially causing friction among surviving loved ones, and families could miss out on valuable allowances such as the residence nil-rate band.”
Keep detailed records
Accurate records are essential to ensure gifts are properly documented and recognised for tax purposes.
Rickman advised: “Above all, keep good records of what you give, who you gave it to, and where the money came from.
“Without clear documentation, your loved ones may struggle to prove to HMRC that gifts were legitimate and could face unexpected tax bills as a result.”
Open a Junior ISA for children
If you have children in your life who are under the age of 18, you could consider paying into a junior ISA for them each year. This is counted as being given away immediately for IHT purposes but is tied up until they reach the age of 18.