These actions could lower your inheritance tax bill, even though the government has collected a record amount of it in recent years
In Britain, the inheritance tax (IHT) is frequently ranked as one of the least popular taxes, and the controversy surrounding it only seems to get worse as more money goes into government coffers.
According to the most recent data from HMRC, the Treasury received 2.22 billion in inheritance tax revenue during the first quarter (April to June) of the 202526 fiscal year. Comparing the figure to the same period in 2024 - 2025, inheritance tax receipts increased by 134 million, or 6%.
After collecting 8.2 billion in inheritance tax last year, it was already the fourth consecutive year with a record haul. According to the OBR's latest forecast, which was released at the Spring Statement, another record year is anticipated as rising housing costs and fiscal drag drive up bills and attract more families to the IHT net.
It is anticipated that IHT will bring in 931 billion for the Treasury in 2025 - 2026 and that revenues will surpass 14 billion in 2029 - 2030.
With the chancellor extending the freeze on IHT thresholds until 2030 and bringing inherited pensions and AIM shares into the IHT net starting in April 2027 and April 2026, respectively, changes in the 2024 Autumn Budget are likely to worsen the effect moving forward.
Farmers and family business owners were particularly offended by the changes to the rules governing business and agricultural property relief, as they might have to sell their properties to cover IHT bills they had previously been exempt from.
Even if the deceased person passes away before the current minimum age of 55 to begin receiving their pension, families who inherit a loved one's pension will be required to pay inheritance tax on the pot starting in April 2027, according to more recent confirmation.
Additionally, Reeves appears to still be working on inheritance tax. She may be considering cracking down on gifting regulations in order to further tighten the IHT regulations, according to rumors. The taper rules that can lower the IHT bill on gifts given within seven years of a person's death could be scaled back, as well as limiting the amount that a person can give to avoid IHT during their lifetime.
Nevertheless, you can still take certain actions to reduce your IHT liability and give your loved ones a larger portion of your estate. We look more closely.
1. Make a decision
First things first, you should draft a will. Intestacy is a set of predetermined rules that will govern how your estate is divided if you do not have a will. This implies that the inheritance you desire may not be given to your loved ones.
You can also designate who will inherit the family home by creating a will. This kind of decision can affect the amount of inheritance tax owed. For instance, you may be eligible for an extra tax-free benefit known as the residence nil-rate band if you leave the family home to your children or grandchildren. More information on that is provided below.
2. Make use of your tax-free benefits
Before any inheritance tax is owed, you can leave an estate up to £325,000 when you pass away.
Another 175,000 allowance, called the residential nil-rate band, may be available to you if you leave the family home to a lineal descendent, such as a child or grandchild. When your estate is worth more than £2 million, this extra allowance is reduced.
Civil partners and married couples are permitted to combine their nil-rate bands. Accordingly, a couple could potentially leave their children an estate worth up to £1 million before any taxes are due (325,000 + 175,000 + 325,000 + 175,000).
Additionally, assets bequeathed to a spouse or civil partner are not subject to inheritance tax. According to Ian Dyall, head of estate planning at wealth management company Evelyn Partners, "the issue becomes more pressing for those who are in a relationship but unmarried, whether co-habiting or not."
He goes on to say, "It may be that many older couples in committed relationships choose to get married in order to solve this issue, at least temporarily." If both partners' assets are passed on to the next generation and fall outside of the nil rate band, inheritance tax will still be owed.
3. Give assets while you're still alive
While giving away assets during your lifetime may help your loved ones avoid inheritance taxes or pay less, there are stringent regulations in place to combat tax evasion.
Each tax year, a person can donate up to £3,000 of their assets to family members without having to pay IHT on that amount. You can combine the allowance if you didn't use it the previous year and pass on £6,000 instead. You can donate 2,500 to your grandchildren or great-grandchildren, 5,000 to your children for their wedding, and 1,000 to anyone else. You can give as much as you want, but if you pass away within seven years of giving the gift, IHT will be due on a taper relief sliding scale. The majority of gifts are exempt from the tapering rules, which are frequently misinterpreted. Taper relief is only applicable if the total amount of gifts given during the seven years prior to your death exceeds the tax-free threshold of £325,000. Any extra money from your regular income can also be used to buy gifts.
Inheritance tax does not apply to gifts from surplus income, regardless of their size. However, the giver must be able to demonstrate that the gift was made with income rather than capital in order to be eligible.
The gift must also not negatively affect the giver's quality of life.
4. Read about the evolving pension regulations
Since inherited pensions are currently exempt from the IHT net, pensions have historically been a tax-efficient way to transfer wealth to loved ones. However, an announcement in the 2024 Autumn Budget will cause the rules to change in April 2027.
"Retirees may not want to be sitting on a large pension pot when they pass away because it will increase the value of the estate and may create or increase an IHT liability," Dyall says of the change to the budget rule.
"In addition, the pension IHT change may result in double taxation for certain pots if the holder passes away at 75 or older. This is because the beneficiary may be subject to income tax at their marginal rate when they take money out of the pension that has already been subject to 40 percent IHT.
The inherited pension would only be worth 33p per pound to beneficiaries who are additional-rate taxpayers.
Given this, Dyall suggests that instead of depending on savings or other assets to support their lifestyle after they turn 75, retirees might want to think about taking a larger payout from their pension. Because pension pots offer inheritance tax benefits, many people used to prioritize other savings.
However, the situation varies greatly depending on your individual situation and is complicated. For instance, you must balance any IHT considerations against the income tax paid on pension withdrawals if you choose to alter your plan and rely more on your pension in reaction to the new regulations.
If the saver is "near a big marginal tax step or paying the 45 percent additional rate of income tax," Dyall claims that this is particularly true.
5. Take a look at purchasing AIM stock
The London Stock Exchange's AIM division gives investors access to smaller businesses. AIM shares have not been subject to IHT in the past.
Although the Autumn Budget announced changes to this, AIM shares will still be more tax-efficient than other assets starting in April 2026. The new regulations will impose a 50 percent tax, resulting in an IHT rate of 20 percent, which is half of the standard rate of 40 percent.
Given this, purchasing AIM stock as a component of a diversified investment portfolio might be worthwhile. But keep in mind that because AIM companies are smaller, less regulated, and frequently more immature, their shares are frequently riskier than those listed on the main stock exchange.
6. Take care of your ISA
Despite the fact that ISAs are generally tax-efficient, keep in mind that they still count toward your taxable estate upon your death. In other words, inheritance tax could consume up to 40% of your ISA.
Additionally, unless inherited by a spouse or civil partner, ISAs lose their tax-efficient status upon death. This implies that your designated beneficiary will not be eligible to receive tax-free income or asset growth from your ISA.
Seven.
Employ trusts. Using a trust allows you to keep some control over how your assets are used while ringfencing them and removing them from your estate to avoid inheritance tax.
There is typically no IHT due on funds held in the trust if you live for seven years. However, unless the taper rules mentioned above apply, your estate will be required to pay inheritance tax at the full 40 percent if you pass away within seven years of transferring into a trust.
In terms of financial plans, trusts are becoming more important since the government declared that pensions would no longer be inherited IHT-free. The number of trusts established in 2024 increased by nearly 200 percent over 2023, according to wealth manager Quilter, and uptake in 2025 is already expected to significantly exceed this level.
8. Obtain a life insurance policy
Purchasing life insurance, also referred to as inheritance tax insurance, could assist your loved ones in managing the liability if you are concerned that they may be faced with a sizable inheritance tax bill.
Many people make the inheritance tax error of having the policy written into trust; otherwise, the payout will be included in your taxable estate.
"The trustees (your beneficiaries) can use the proceeds to promptly settle the IHT bill when you pass away," explains Dyall. "You pay the monthly premiums."
"This can also have the added benefit of saving executors some potential stress as it will provide accessible funds to settle the IHT liability with HMRC, which must be done before probate is granted," he continues.
Additional advice on this process and whether it is appropriate for you can be obtained from a financial advisor or legal specialist.
9. 9.
Contribute to a nonprofit. Finally, your IHT rate for the remainder of your estate may be reduced by four percentage points, from 40 percent to 36 percent, or a 10 percent savings, if you donate at least 10 percent of your estate to charity.
The government's IHT calculator can be used to determine whether your estate is eligible for the lower rate.
We dispel some myths about IHT in a different post.
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