Inheritance tax planning is no longer a concern only for the very wealthy. Frozen tax-free allowances, rising property values and changing reliefs mean more families are edging towards the 40% charge on estates above the nil-rate band.
HMRC collected £8.4 billion in inheritance tax (IHT) in 2024/25 and the Office for Budget Responsibility projects £9.1 billion for 2025/26 – almost double what it was a decade ago (OBR, 2025). Meanwhile, HMRC data shows just 4.39% of deaths generated an IHT bill in 2021/22, but that share is climbing after years of stagnation (HMRC, 2024).
Against this backdrop, timely inheritance tax planning offers a genuine opportunity to protect family wealth, fund future ambitions and pass on assets efficiently. In the following guide, we explain how the tax works, outline the 2025/26 thresholds and exemptions, and walk through practical tools – gifting, trusts, life insurance and more – that can shrink your eventual bill. Whether you are reviewing your own affairs or advising elderly relatives, the principles are the same: take advice, act early, keep records and revisit the plan as life changes.
How inheritance tax works
IHT is charged at 40% on the taxable value of an estate above available allowances. The core nil-rate band (NRB) remains £325,000 and has been frozen until at least April 2028. In addition, the residence nil-rate band (RNRB) allows up to £175,000 when passing a main home to direct descendants. Combined, a married couple or civil partners can transfer up to £1 million free of IHT by combining their allowances (HMRC guidance, 2025). Although it should be noted that the residence nil rate band reduces should your estate exceed £2 million and disappears altogether for an estate of £2.3 million (or £2.7million if joint).
Rates fall to 36% if at least 10% of the taxable estate is left to charity, and certain assets, such as UK-listed shares gifted to charities, are exempt altogether.
Current thresholds and reliefs for 2025/26
- Nil-rate band: £325,000 per individual.
- Residence nil-rate band: £175,000, tapered once an estate exceeds £2 million.
- Spouse or civil partner exemption: Unlimited transfers.
- Charity exemption: 100% relief.
- Business and agricultural property reliefs: Up to 100% (subject to reforms capping relief at £1 million from April 2026).
- Gifts out of surplus income: Exempt if they do not reduce the donor’s normal standard of living.
These allowances underpin every inheritance tax planning discussion, so review them alongside wills and asset valuations at least every three years.
Why early inheritance tax planning pays off
Waiting until later life can be expensive. Asset growth may outpace allowances, new rules can bite unexpectedly and, crucially, some reliefs depend on survival periods. The seven-year rule for gifts is the clearest example – miss that window and the saving evaporates. Early planning also brings peace of mind and lets you support younger generations when the help matters most.
Gifting: Simple moves that save thousands
Regular gifts, correctly documented, are one of the most effective inheritance tax planning tactics. Care is needed to ensure taxes such as capital gains tax are not triggered and therefore taking advice is recommended.
Record-keeping is essential. HMRC can seek evidence many years later, so keep bank statements and written intentions with your Will.
Trusts: Keeping control while reducing exposure
Trusts can remove assets from your estate yet allow you to influence how beneficiaries use them. Popular structures include:
- Bare trusts:
Assets: Beneficiaries gain absolute entitlement at 18 (16 in Scotland). Simple, but control is limited.
- Discretionary trusts:
Flexibility: Trustees decide when and how beneficiaries benefit – useful for future-proofing but subject to ten-year periodic charges.
There is an opportunity prior to April 2026 to make use of these trusts to maximise the APR and BPR reliefs currently available. This planning is not suitable for all and therefore it is key that specialist advice be obtained before putting assets into trust.
- Interest-in-possession trusts:
Income: A life tenant enjoys income for life; capital passes later to other beneficiaries.
Trust rules are technical and periodic charges can arise, so professional advice is vital. Our specialist team can model the lifetime and post-death tax impact before any trust is settled.
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Life insurance and other modern tools
Whole-of-life policies written in trust can create a tax-free lump sum to meet the eventual IHT bill. Premiums are typically paid from surplus income, preventing additional gifts from depleting allowances. Other options include:
- Pension flexibility: Defined-contribution pension pots usually fall outside the estate. Government proposals may change this from April 2027, so keep an eye on consultations (OBR, 2025).
- Business relief investments: Shares in qualifying AIM-listed companies can attract 100% IHT relief after two years of ownership, though risk levels are higher. From April 2026 this relief is reduced to 50%.
- Family investment companies: For larger estates, these can combine company-law control with gradual value transfer, but ongoing costs require scale.
Pitfalls to avoid
- Late planning: Leaving gifts until the final years of life undermines the seven-year rule and can create tapered charges.
- Ignoring the RNRB taper: Estates above £2 million lose £1 of RNRB for every £2 above the threshold, so lifetime gifts that bring the estate below £2 million can restore the allowance.
- Not insuring for liquidity: Large IHT liabilities can force sales of illiquid assets like property or family businesses at unfavourable times.
- Out-of-date wills: Major life events – marriage, divorce, new children – should trigger an immediate review to ensure your estate plan still works. All business owners and farmers should be reviewing their Wills now (pre-April 2026) to ensure BPR and APR reliefs are maximised. For married couples, failure to do this could lead to £1 million of relief being lost on first death where all assets pass to the surviving spouse.
Professional guidance and regular reviews
Tax rules evolve, investment markets move and family circumstances change. A robust inheritance tax plan therefore needs maintenance:
- Three-year reviews: Check allowances, asset values and will provisions.
- Record audits: Ensure gift registers and trust deeds are complete.
- Cashflow modelling: Forecast the IHT bill under various scenarios, allowing time to adjust strategy.
Our advisers at Cottons Group are here to help you, and work alongside solicitors and financial advisors to ensure you get wholistic and tailored advice.
Secure your family’s future
Inheritance tax planning is ultimately about choice: choosing who benefits from your life’s work, when they benefit and how much value is lost in tax. By combining the core allowances with thoughtful gifting, trusts and protection policies, you can reduce or even eliminate a future IHT bill while still enjoying your wealth. Our dedicated inheritance tax planning team works with families across the UK, guiding them through every step – from initial fact-find to implementation and ongoing reviews.
If you would like personal advice or a second opinion on your current arrangements, get in touch. Effective inheritance tax planning starts with a conversation, and that call could save your family a substantial sum. Contact our specialists today and secure your legacy.
