Inheritance Tax can significantly reduce the amount of money, property and other assets you leave to your loved ones. Understanding the available allowances, exemptions and reliefs can help you make informed decisions and plan ahead.
At Viva Planning, we can help you understand the options available to your family. Our associated firm, Mercian Accountants, can also prepare a tax planning report setting out recommendations based on your individual circumstances.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax that may be payable on someone’s estate when they die. An estate can include property, money, investments and personal possessions.
Depending on your circumstances, it may include:
Money held in bank and savings accounts.
Your home and any other properties.
Land and buildings.
Shares and investments.
Vehicles, jewellery, artwork and other valuable possessions.
Certain jointly owned assets.
Life insurance payouts that form part of your estate.
Most unused pension funds and pension death benefits for deaths on or after 6 April 2027.
The value of your estate is assessed against the available Inheritance Tax allowances and any exemptions or reliefs that apply.
How much can you leave without paying Inheritance Tax?
The standard Inheritance Tax allowance is called the Nil Rate Band (NRB). For the 2026/27 tax year, it remains at £325,000.
This means that, subject to previous taxable gifts and other relevant adjustments, the first £325,000 of an individual’s estate can usually be passed on without Inheritance Tax.
There is also an additional allowance called the Residence Nil Rate Band (RNRB).
This is worth up to £175,000 and may be available when you leave a qualifying home to direct descendants, such as your children or grandchildren.
For someone who qualifies for both allowances, this can increase the amount they can pass on without Inheritance Tax to £500,000.
The Residence Nil Rate Band is reduced by £1 for every £2 that an estate exceeds £2 million. It can therefore be lost altogether for larger estates.
Inheritance Tax is generally charged at 40% on the taxable amount above the available allowances and after applicable reliefs. A reduced rate of 36% may apply if at least 10% of the relevant net estate is left to qualifying charities.
What about married couples and civil partners?
Married couples and civil partners can usually benefit from the transfer of unused Nil Rate Band and Residence Nil Rate Band allowances when the first partner dies.
If both partners qualify and leave a qualifying home to direct descendants, their combined allowances could reach £1 million.
However, this is not automatic in every situation. The available amount depends on the allowances used on the first death, the surviving partner’s estate and whether the conditions for the Residence Nil Rate Band are met.
Important Inheritance Tax changes
There are two significant changes that families should consider when planning their estates.
Pensions from April 2027
From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the value of an estate for Inheritance Tax purposes.
This means pensions should no longer automatically be treated as outside the Inheritance Tax calculation. The change may affect families who have previously relied on pensions as a way of passing wealth to the next generation.
Business and Agricultural Relief from April 2026
From 6 April 2026, a combined £2.5 million allowance applies to qualifying assets receiving 100% Business Relief and Agricultural Relief. Qualifying value above the available allowance generally receives 50% relief.
These changes make it particularly important for business owners and farming families to review their arrangements.
What is exempt from Inheritance Tax?
There are several exemptions that can help reduce the amount of Inheritance Tax payable.
Making use of these exemptions can be an important part of estate planning, although the rules and conditions need to be understood.
Leaving your estate to others
Some gifts and legacies are exempt from Inheritance Tax.
These include qualifying transfers to:
Your spouse or civil partner.
Registered charities.
Qualifying political parties.
Certain other organisations and bodies that meet the relevant exemption requirements.
Gifts between spouses and civil partners are generally exempt, although special rules can apply where the recipient is not a long-term UK resident.
Leaving money to charity in your Will can also reduce the rate of Inheritance Tax on your estate. If at least 10% of the relevant net estate is left to qualifying charities, the rate on the taxable estate may fall from 40% to 36%.
Making use of your annual gift allowance
You can give away up to £3,000 in gifts during each tax year without those gifts being added to your estate for Inheritance Tax purposes.
This is known as the Annual Exemption.
If you do not use the full allowance, you can carry the unused amount forward for one tax year. This means you could potentially use up to £6,000 in a single year, provided you meet the conditions.
There are also other gift exemptions.
Small gifts
You can give as many gifts of up to £250 per person in a tax year as you wish, provided you have not used another gift allowance on the same person.
Wedding and civil partnership gifts
You can make tax-free gifts for a wedding or civil partnership up to the following amounts:
£5,000 to your child.
£2,500 to your grandchild or great-grandchild.
£1,000 to another person.
Gifts to qualifying organisations
Gifts to qualifying charities and certain other exempt organisations can be free from Inheritance Tax.
Helping with living costs
You may also be able to make regular payments to help another person with their living costs. This could include supporting an elderly relative or helping a child with rent.
For these payments to qualify as normal expenditure out of income, they must come from your regular income, form part of your normal spending pattern and leave you with enough income to maintain your usual standard of living.
Keeping clear records of gifts and payments is important.
The seven-year rule and Potentially Exempt Transfers
One of the ways of reducing the value of an estate is making gifts during your lifetime.
An outright gift to another individual may be treated as a Potentially Exempt Transfer (PET).
Generally, if you survive for seven years after making the gift, it falls outside your estate for Inheritance Tax purposes.
However, if you die within seven years, the gift may become chargeable.
The value of relevant gifts is taken into account when calculating the available Nil Rate Band. If the gifts use up the allowance, Inheritance Tax may become payable.
What is taper relief?
If you die between three and seven years after making a taxable gift, taper relief may reduce the amount of Inheritance Tax payable on that gift.
The important point is that taper relief reduces the tax due, not the value of the gift itself.
It only applies where the relevant gifts exceed the available Nil Rate Band. Gifts made within three years of death do not benefit from taper relief.
You should also be aware that giving away an asset does not always remove it from your estate. For example, if you give your home to a family member but continue living there without paying a full market rent, the gift may be treated as a gift with reservation of benefit.
This means the property may still be included in your estate for Inheritance Tax purposes.
Business Relief
Business Relief can reduce the value of certain business assets when calculating Inheritance Tax.
It may be particularly important for business owners who want to pass their business on to family members or other beneficiaries.
From 6 April 2026, qualifying business and agricultural assets share a combined allowance of £2.5 million for 100% relief.
Any qualifying value above the available allowance generally receives 50% relief, rather than 100%.
Qualifying assets may include:
A business or an interest in a business.
Shares in an unlisted company.
Certain business property, land, buildings and machinery, where the relevant conditions are met.
Some assets receive 50% relief rather than 100% relief, including qualifying shares traded on markets such as AIM.
The rules are detailed, and not every business or business-related asset qualifies. Ownership periods, how the business operates and the nature of the assets can all affect eligibility.
In many cases, the business or asset must have been owned for at least two years before death or the relevant transfer, although specific conditions and exceptions apply.
Can married couples share the Business Relief allowance?
An unused Business and Agricultural Relief allowance may be transferable from a deceased spouse or civil partner.
This could increase the available 100% relief allowance to as much as £5 million for a qualifying surviving partner.
However, the amount available depends on the allowances used and the relevant estate and transfer history.
Agricultural Relief
Agricultural Relief may be available where an estate includes qualifying agricultural property.
This can include certain farmland, pasture, farm buildings and other qualifying agricultural assets used for agricultural purposes.
From 6 April 2026, Agricultural Relief shares the £2.5 million allowance for 100% relief with Business Relief.
Qualifying agricultural property above the available allowance generally receives 50% relief.
The rules depend on the type of property, how it is used and the ownership or occupation conditions. Owning farmland does not automatically mean that it qualifies.
For farming families, professional advice can help establish which assets qualify and how the changes may affect the value of an estate.
Can Lifetime Trusts help with Inheritance Tax planning?
Lifetime Trusts are sometimes used as part of wider estate planning.
A trust can allow assets to be held by trustees for the benefit of chosen beneficiaries, rather than being transferred to them outright.
However, trusts are not a guaranteed way to avoid Inheritance Tax.
When assets are transferred into certain types of trust, the transfer may be treated as a chargeable lifetime transfer. If the value exceeds the available Nil Rate Band, an immediate Inheritance Tax charge may arise.
Relevant property trusts can also face periodic charges, generally every ten years, and exit charges when assets leave the trust.
There may be other tax consequences too, depending on the assets and the type of trust.
A trust should therefore be considered for the wider benefits it may provide, such as managing an inheritance, protecting vulnerable beneficiaries or controlling how assets are distributed.
Any potential tax advantages need to be weighed against the costs, charges and legal responsibilities involved.
Tax planning and reviewing your Will
There is no single Inheritance Tax planning solution that works for everyone.
Your estate may benefit from a combination of strategies, depending on the value of your assets, your family circumstances and your long-term wishes.
For example, planning may involve:
Reviewing your Will to make sure it reflects your wishes and takes available allowances into account.
Making appropriate use of annual gift allowances and other exemptions.
Considering lifetime gifts where suitable.
Reviewing business or agricultural assets to establish whether relief is available.
Considering whether a trust is appropriate for your family.
Reviewing how property and other assets are owned.
Considering how future pension changes may affect your estate.
The earlier you review your arrangements, the more time you may have to consider your options.
For larger estates, a professional tax planning report can help bring the different parts of your financial and estate planning together.
Could life insurance help with an Inheritance Tax bill?
Life insurance does not normally reduce the amount of Inheritance Tax due on an estate.
However, it can provide money to help your beneficiaries or executors meet an Inheritance Tax bill.
If a suitable policy is written in trust, the payout may be kept outside the deceased person’s estate, subject to the policy and trust arrangements.
This can also help beneficiaries access the money without waiting for the estate’s probate process to be completed.
The policy must be structured correctly, and premiums, affordability and the amount of cover required should all be considered.
Life insurance is therefore a way of providing funds to meet a potential tax bill, rather than a way of removing the underlying tax liability.
How Viva Planning can help
Inheritance Tax can be complicated, particularly when property, pensions, business interests and trusts are involved.
At Viva Planning, we can help you understand the options available and identify areas where further planning may be worthwhile.
Our associated firm, Mercian Accountants, can prepare a tax planning report tailored to your circumstances. This can set out the relevant allowances, exemptions and reliefs, along with recommendations for your consideration.
We believe that good planning starts with understanding your position before making any major decisions.
Arrange your free, no-obligation review to find out what you may need to consider and how you could plan for the future of your estate.
