Most families don’t give inheritance tax much thought until it’s already a problem. The nil-rate band has been stuck at £325,000 since 2009, and property prices along with pension pots have grown so much in that time that far more estates now cross the threshold.
That number will only grow. Pensions come into scope from April 2027, which will drag even more people into the net. But there are proper, legal ways to bring an IHT bill down, and they all work better when you start early and combine them.
The IHT Thresholds for 2026/27
If you’re a long-term UK resident, you’ll have a nil-rate band (NRB) of £325,000, and anything above that gets taxed at 40%. Leave your main home to direct descendants like children or grandchildren, and you can add the residence nil-rate band (RNRB) of £175,000 on top, which brings the total to £500,000 per person. Couples can do even better. Married couples and civil partners can transfer any unused allowance to the surviving spouse, so between the two of them they can potentially pass on up to £1 million before IHT applies.
Bigger estates will run into trouble though. The RNRB tapers once an estate exceeds £2 million, dropping by £1 for every £2 above that figure, and it vanishes entirely at £2.35 million. Both bands are frozen until at least April 2031, so these limits won’t rise any time soon.
Gifting and the Seven-Year Rule
Giving money or assets away is the simplest way to shrink your estate. The allowances can add up quickly. You’ve got an annual exemption of £3,000 per tax year, plus small gifts of up to £250 per person to as many recipients as you like, and wedding gifts come with their own separate limits depending on your relationship to the couple.
Anything larger will count as a potentially exempt transfer (PET). Once seven years have passed since the gift, it’ll fall outside your estate completely. If the seven years don’t run their full course, the gift comes back into the estate, though taper relief will reduce the tax owed from year three onwards on gifts above the nil-rate band, which is exactly why timing matters so much, because the sooner those transfers happen, the better the odds they’ll be fully exempt.
Regular gifts from surplus income deserve attention too. If you can show that these payments follow a pattern from your income instead of capital, and that they don’t reduce your standard of living, they’ll be immediately exempt with no seven-year wait at all.
Pensions: A Major Change in April 2027
For years, pensions have fallen outside the estate for IHT purposes, which made them one of the most tax-efficient assets to leave behind. That will change on 6 April 2027. The Finance Act 2026 confirmed that most unused pension funds and death benefits will count as part of your estate, and for families whose wealth is concentrated in pensions and property, this could turn a manageable position into a six-figure tax bill.
Don’t panic and pull large sums out of your pension to dodge IHT, though. Doing that can trigger income tax at up to 45%, or 60% if it pushes you into the personal allowance taper. What you should do is reassess how pensions fit within a broader estate plan well before April 2027 arrives.
Business Property Relief After April 2026
Previously, business owners could rely on 100% Business Property Relief (BPR) to pass on qualifying assets entirely free of IHT. A cap now applies. From April 2026, the 100% relief only covers the first £2.5 million of combined business and agricultural property, and anything above that qualifies for just 50% relief, meaning a 20% effective IHT rate on the excess. AIM-listed shares have taken a hit as well, dropping from 100% relief down to 50%.
Unused BPR allowance can now transfer to a surviving spouse, a concession added after the original proposals banned it, but this still represents a major change for family businesses with substantial asset values on their books.
Trusts and Family Investment Companies
Trusts can help move assets out of an estate while keeping some control over how they’re distributed. You can settle up to the NRB (£325,000) into a discretionary trust without triggering an immediate IHT charge, and they pair well with life insurance policies written in trust. The downside is ongoing administration and periodic charges every ten years.
With family investment companies (FICs), parents transfer shares to their children but hold on to control through voting rights, so the growth accrues to the next generation instead of the parents’ estate. FICs don’t carry the periodic charges that trusts do, but they come with their own complications around corporation tax and anti-avoidance rules, so professional advice will be essential.
How to Make These Tools Work Together
No single tool will solve an IHT problem on its own. The real benefit comes from layering them: gifting to reduce the estate over time, life insurance in trust to cover a potential tax bill, restructured business assets to maximise relief, and an adjusted pension drawdown strategy before April 2027 hits.
Pulling money from a pension to fund gifts, for example, will change both your income tax position and your estate value at the same time. Integrated wealth management services can tie all of this together, because estate planning shouldn’t be treated separately from investment strategy, tax planning, cash flow modelling and your wider financial decisions. A decision that helps on estate value can easily cost more in income tax if nobody runs the numbers across both.
What This Means If You’re Planning Now
The next 18 months are unusual in one specific way: the rules are already written. Normally estate planning means guessing what a future chancellor might do, but the pension change, the BPR caps and the frozen bands are all confirmed and dated. You know exactly what the tax position looks like on 6 April 2027, which means every plan made between now and then is built on certainty rather than prediction. That almost never happens.
It also means the usual excuse for delay has gone. Waiting to see what happens makes sense when the rules are in flux, but nothing here is in flux anymore. A family that reviews its position this year is planning with the same information it’ll have in 2027, just with two extra years of gifting, restructuring and pension adjustments still available. The window isn’t about new facts arriving. It’s about the options that quietly expire while you wait for them.
Please note: Investment values can fall as well as rise, and the same applies to the income they generate. You might not get back everything you put in. An investment’s history is no guarantee of its future.