Inheritance tax is affecting more estates – top tips to reduce your bill

Passing on wealth without incurring an outsized inheritance tax bill is a perennial concern for UK families. With the UK in the midst of a period of unprecedented wealth transfer from baby boomers to younger generations, and tax-free inheritance tax thresholds frozen until at least 2030, inheritance tax bills are rising and more families than ever are now caught up in paying this tax.

Driving home this point, new figures released yesterday by HMRC reveal inheritance tax receipts of £8.2 billion from April 2024 to March 2025, an increase of £0.8 billion compared with the same period during the previous year. 

Laura commented: “Managing inheritance tax is a huge and growing concern for families but thankfully, with careful planning and proactive steps, a lot can be done to reduce the size of the bill.” 

Here Laura shares her top tips for reducing inheritance tax: 

1.    Calculate your current inheritance tax exposure 

Do you know the value of the assets in your estate, which are subject to inheritance tax and whether you qualify for the residence nil-rate band? Before you can take informed steps to reduce inheritance tax, you’ll need to understand how much tax your estate could face. 

“The big change is that from April 2027, pensions fall into your estate for inheritance tax purposes. If this pushes estates above £2 million, it can take someone from having a low inheritance tax exposure to a high one. This is because the taper for the residence nil rate band kicks in for estates over £2 million, which means you face the double whammy of inheritance tax on your pension while also losing some or all your residence nil rate band,” says Laura.

2.    Make sure you have a will and that it is up to date

Having a will is a cornerstone of estate planning. If you don’t have one, your estate is shared out according to intestacy rules, which may not reflect your wishes or be tax-efficient. Where you have a will already, make sure it’s up to date and review it as part of estate planning, taking care when tax rules change.

Laura says: “A relevant example is changes to business property relief and agricultural property relief from April 2026. In a typical will, all assets are left on first death to the surviving spouse but because the new £1 million lifetime limit across these reliefs isn’t transferable between spouses, you are essentially foregoing the use of one spouse’s £1 million limit if you leave relevant business and farming assets in this way. There’s a very real need here for those affected to revisit their wills.”

3.    Take advantage of the seven-year rule

The seven-year rule relates to assets that are subject to inheritance tax. It allows you to give them away during your lifetime and, if you survive for seven years after making the gift, it becomes exempt from inheritance tax.

“While most people are aware of the seven-year rule, they often don’t know that inheritance tax begins to taper away after three years. They think they’ve left it too late and hold off from doing anything at all. But if you make a gift and survive for at least three years, there is less inheritance tax to pay. 

“Life insurance is valuable too. Should you die within seven years, you won’t leave the recipient of your gift with an unwelcome inheritance tax bill,” says Laura.

4.    Make the most of annual gifting allowances and regular gifts out of excess income

You can make various gifts without worrying about inheritance tax at all. You have an annual £3,000 gifting allowance, which can be rolled over once. This means that if you didn’t use yours during the previous tax year, you’ll have £6,000 – or £12,000 as a couple. 

There are also various smaller gifts you can make that are free from inheritance tax as well as regular gifts from excess income.

As Laura explains: “These regular gifts from income are often overlooked. There's no statutory definition of ‘regular’. It could be once a year or once a month but you need to be able to show that you are making these payments regularly. And they must be out of income – for example pension income or interest on savings – that you have left after covering your living expenses. Recordkeeping is key.”

5.    Leave money to charity via your will

By leaving 10% or more of your net estate to charity via your will, the effective rate of inheritance tax on the remainder of your taxable estate drops from 40% to 36%.

Laura cautions that you should take care with the details: “You’ll need to show this in your will as a proportion of your estate – 10% or more – rather than a set sum and it needs to be your net estate and not your gross estate.”  

6.    Consider investing in assets that benefit from business property relief 

While the Government has introduced significant changes to inheritance tax relief on assets qualifying for business property relief, it can still reduce inheritance tax and remains valuable.

From April 2026, there is a £1 million lifetime allowance across business property relief and agricultural property relief for those assets qualifying for 100% relief (plus lifetime gifts from 30 October 2024 where the person giving the gift dies on or after 6 April 2026). The balance of qualifying assets will be eligible for 50% relief. AIM shares will qualify for relief at 50% rather than 100% when held for more than two years.

“Despite the changes, this still amounts to a 20% relief from inheritance tax for business property relief assets after April 2026, and for most people, even where they have shares in a trading company, the £1 million lifetime limit is sufficient to cover all their assets,” says Laura. This is of course subject to wider investment decisions.

7.    Is a trust or Family Investment Company appropriate?

Trusts and Family Investment Companies can help reduce inheritance tax by accelerating the shift of wealth from your estate to the next generation but without moving control to the next generation. 

Laura explains: “Family investment companies are separate legal entities where family members hold shares. They allow you to maintain control over and protect the assets. Trusts are also separate legal entities but once you put assets into a trust, they are under the control of the trustees and are no longer yours. Both are complex from a tax and legal perspective so you will need good advisers to plan and implement them.” 

8.    Spend your money!

There is no inheritance tax to pay if you spend your money. “Just make sure you have enough to look after yourself first and to cover future costs like care,” Laura says.