First, know your allowances
Every individual gets a £325,000 nil-rate band (NRB). If you leave your main home to direct descendants, you also get a £175,000 residence nil-rate band (RNRB). A couple can pool both, so up to £1 million can pass IHT-free.
The RNRB tapers by £1 for every £2 of estate value above £2 million, so high-value estates lose it entirely. The first job is always understanding which allowances actually apply to you.
1. Use the gifting rules
HMRC allows several tax-free gifts each year:
- £3,000 annual exemption — give away £3,000 each tax year, IHT-free immediately. Unused allowance can carry forward one year.
- Small gifts — up to £250 per person per year to as many people as you like
- Wedding gifts — £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Gifts from surplus income — unlimited, provided they're regular and don't reduce your standard of living
- Potentially Exempt Transfers (PETs) — larger gifts become fully IHT-free if you survive 7 years; tapered relief between 3 and 7 years
2. Put life insurance in a trust
A life insurance payout usually forms part of your estate and is taxed at 40% above the nil-rate band. Writing the policy into a trust takes the payout outside your estate entirely — no IHT, and beneficiaries get the cash within weeks rather than waiting for probate.
This is one of the cheapest, easiest wins in estate planning. The trust deed costs a few hundred pounds but can save tens of thousands in IHT. Pair it with a Letter of Wishes so trustees know how to act.
3. Use trusts for control and tax efficiency
Discretionary trusts, will-based trusts (also called nil-rate band discretionary trusts), and family investment companies can ringfence assets, protect them from divorce or care fees, and reduce IHT on second deaths.
A will-based trust is particularly powerful for couples on a second marriage or with children from a previous relationship — assets pass into trust on first death, supporting the survivor for life and then going to the chosen beneficiaries.
4. Pensions, business relief, and AIM shares
Personal and workplace pensions sit outside your estate for IHT and can be passed to nominated beneficiaries tax-efficiently. Drawing from other assets first and preserving the pension is a common high-net-worth tactic.
Business Relief (BR) gives 100% IHT relief on qualifying business assets and AIM-listed shares held for 2+ years. This can be powerful — but the rules are detailed and the upcoming 2026 reforms cap the 100% relief at £1m of combined business and agricultural assets. Get advice before relying on it.
5. Charitable giving
Gifts to UK registered charities are 100% IHT-free. Leave 10% or more of your net estate to charity and the IHT rate on the rest drops from 40% to 36%.
