What’s the best way to reduce inheritance tax on my estate?

This is happening to more families than many people realise. Not because they’ve earned high salaries, taken risks or chased returns, but because time, property growth and frozen tax thresholds have pushed them into the inheritance net.

It’s perhaps one reason why more people are choosing to pass on wealth during their lifetime, rather than bequeathing it.

But the rules around gifting money, property and assets are not always as straightforward as they first appear. Done properly, lifetime planning can significantly reduce a future inheritance tax bill. Done without care, gifts and plans you thought were effective could still be counted as part of your estate.

Everyone has a £325,000 inheritance tax allowance, known as the nil-rate band. If your home passes to children or grandchildren, there’s an additional £175,000 residence allowance.

For married couples or those in a civil partnership, this can mean up to £1 million may be passed on before inheritance tax applies.

The difficulty is that these limits have been frozen since 2009. Over that time, many homes have doubled or tripled in value. Investments have had decades to compound. And people are living longer, often without needing to spend their capital in retirement.

It’s also worth noting that pension funds have usually sat outside the inheritance tax net. Many people have built up significant wealth in pensions on the understanding that these funds would not form part of their estate.

However, this is changing. From April 2027, most unused pension funds are expected to be included within the value of an estate for inheritance tax purposes. This marks a significant shift and means pensions may no longer provide the inheritance tax shelter many people have assumed.

The Office for Budget Responsibility expects the number of estates paying the 40% inheritance tax charge to almost double in the coming years, from around 32,200 in 2025–26 to 63,100 by 2029–30.

Inheritance tax is no longer an issue reserved for the very wealthy. It is increasingly affecting families who simply bought a home and saved consistently.

One of the simplest ways to reduce inheritance tax is to spend more of your money on yourself.

Many people reach retirement age and perhaps feel they should continue to preserve capital “just in case”, even when, in reality, their income more than covers their needs. Indeed, many of our IFAs say their clients feel they need “permission to spend” the money they worked so hard to accumulate.

Retirement should be an exciting stage of life – a chance to reinvent yourself, explore new interests and find fresh purpose.

After a lifetime of earning and saving, it’s understandable that some people feel spending more can feel unfamiliar. But from an inheritance tax perspective, the money you use to enjoy the rewards of your hard work is money that cannot be taxed later.

Alongside this, giving money away during your lifetime can also be highly effective. But HMRC treats different types of gifts in different ways. Some fall immediately outside your estate. Others only fall away after time has passed. And some remain inside your estate entirely if the rules aren’t followed carefully.

Each tax year, you can give away £3,000 that won’t be counted towards your estate for inheritance tax purposes.

If you didn’t use last year’s allowance, you can carry it forward for one year, allowing a £6,000 gift.

If you are married or in a civil partnership, this allowance applies to each of you. That means a couple can gift £6,000 every tax year between them, or £12,000 if neither of you used your allowance in the previous year.

In addition, you can give £250 per person, per year, to as many individuals as you like.

On their own, these amounts may not feel transformative. Used consistently over many years, they can move significant sums out of an estate without anyone feeling the impact.

There are also specific allowances when a child or grandchild marries or enters a civil partnership.

You can give £5,000 to a child or £2,500 to a grandchild, and this can be combined with your annual gifting allowance.

These exemptions are often overlooked, but they can be particularly useful at the moments families most want to offer financial support.

When you give away sums above these allowances, the gift can fall into the inheritance tax net. HMRC treats this as what is known as a Potentially Exempt Transfer (PET).

If you live for seven years after making the gift, it falls outside your estate entirely. If you die sooner, some inheritance tax may still apply, although the amount reduces after three years.

This is why early planning tends to be far more effective than last-minute decisions, when it’s often too late.

For some families, there’s also a practical way to remove the anxiety around PETs. A life insurance policy can be arranged to cover the potential inheritance tax that would arise if death occurred within the seven years.

The policy is usually written in trust so that, if needed, the payout sits outside your estate and can be used by your family to settle the tax bill without affecting the gift itself. This doesn’t remove the seven-year rule, but it can remove the financial risk attached to it.

There’s one inheritance tax rule that can be remarkably powerful.

If you have more income than you need to maintain your lifestyle, you can give the surplus away regularly, and those gifts are immediately outside your estate. There is no limit to how much you can give under this rule.

But there are conditions.

The money must come from income, not capital. The gifts must form part of a regular pattern. And you must be able to show that your standard of living has not been affected.

Many families could make use of this rule, but don’t realise it exists. Others attempt to use it but fail to keep the records that would allow their executors to prove it later.

It is possible to give something away but, in HMRC’s eyes, still be treated as benefiting from it.

This is known as a “gift with reservation of benefit”, and it means the asset is still treated as part of your estate.

The most obvious example is giving your home to your children but continuing to live in it rent-free. But this rule can also apply to valuable possessions, artwork, jewellery and family heirlooms if you still use them.

For inheritance tax purposes, a gift must be genuine and complete.

In some situations, trusts are used to pass on wealth while retaining oversight of how it is used.

Often, trusts are set up to protect the interests of children or vulnerable people who are unable to manage money themselves. The most common types are bare trusts and discretionary trusts, each offering different levels of flexibility and control.

The seven-year rule applies to money placed into trust, and in some cases an immediate tax charge can apply if the amount exceeds the nil-rate band.

Certain assets, including trading businesses, some shares, agricultural property and woodland, may also qualify for valuable inheritance tax reliefs.

These areas are more complex and usually benefit from careful advice, but they can form part of a wider, long-term plan.

Whatever approach you take, keeping good records is crucial.

Your executors may one day need to show what you gave, when you gave it, who received it and, in the case of surplus income gifts, details of your income and expenditure at the time.

Without this evidence, HMRC may refuse the relief, even if you followed the rules perfectly.

Another common worry is not just how much inheritance tax might be due, but who has to deal with it.

When someone dies, it is the executors of the estate who become responsible for reporting the estate to HMRC. They arrange to settle any inheritance tax that’s due from the estate. This happens before assets can usually be distributed to beneficiaries.

In most cases, inheritance tax must be paid within six months of the end of the month in which the person died. If it is not paid by then, HMRC begins charging interest.

This can create practical difficulties. The estate may largely consist of a property, investments or other assets that cannot be accessed or sold immediately, yet the tax bill still needs to be settled promptly.

Where gifts have been made in the seven years before death, the recipients of those gifts may also become liable for some of the tax if the estate itself does not have enough funds to cover the bill.

This is another reason why planning, documentation and open family conversations can make a significant difference at what is already a difficult time.

For most families, reducing inheritance tax is not about one dramatic decision. It is about a series of small, consistent, well-documented steps taken over many years, using annual allowances, making larger gifts early where appropriate, passing on surplus income regularly, avoiding gifts that still benefit you, and considering trusts or asset reliefs where suitable.

Done thoughtfully, this kind of planning not only reduces tax. It allows you to enjoy seeing your family benefit from your wealth while you’re still around.

Inheritance tax planning is rarely about complicated strategies. More often, it is about understanding which of the available rules apply to your situation and putting them into practice steadily over time.

If inheritance tax is something you’ve been meaning to look at, or something that has only recently come onto your radar, a conversation with an Amber River financial planner can help turn a vague worry into a clear, manageable plan.