Inheritance Tax Mitigation

Creating wealth takes enterprise. Keeping it in the family takes planning. Inheritance Tax (IHT, the tax charged on your estate when you die, and sometimes on certain lifetime gifts) does not have to be inevitable. There is a wide range of long-established strategies based on statutory reliefs and exemptions that can significantly reduce the bill your family faces, but no single method is a complete solution, and the right mix depends entirely on your circumstances.

This factsheet outlines the main IHT planning routes. It is general information, not advice. Always take professional advice before acting.

This is the reference page: every figure, threshold and relief we quote lives here and is kept current here. For how we sequence the planning itself, and why we do the protection before the tax, read Inheritance Tax: The Squiggle Approach.

The basics: rates and allowances

Before looking at mitigation strategies, it helps to be clear on what you are working with.

• Nil rate band: £325,000 per person. Frozen at this level until 5 April 2031. Anything above it is potentially taxable.
• Residence nil rate band: £175,000 per person. Available where your home, or the proceeds of a home you downsized from, passes to your children, grandchildren or other direct descendants. Also frozen until 5 April 2031.
• Together: £500,000 per person, or £1 million for a couple, where both allowances are fully available and the home passes to descendants.
• Transferable between spouses. Anything unused on the first death passes to the survivor, which is how a couple reach £1 million.
• The residence nil rate band tapers away by £1 for every £2 by which the estate exceeds £2 million. An estate of £2.35 million or more loses it entirely.
• The rate is 40% on everything above the available allowances, reduced to 36% where 10% or more of the net estate passes to charity.
• Transfers between spouses and civil partners are exempt, without limit, and so are gifts to UK charities.
• Tax is due by the end of the sixth month after the month of death, with interest at 7.75% after that. The account, form IHT400, is due within twelve months of the end of the month of death.

Note on the freeze: section 72 of the Finance Act 2026 freezes both bands to 5 April 2031, in a single provision covering the two together. HMRC's published thresholds table still shows 5 April 2030 for the residence nil rate band. That is an error on the page rather than a different rule for that band.

A worked example: where IHT arises

Imagine Patricia, a widow whose late husband's allowances were fully used on his death, with a £900,000 estate. Her home is worth £400,000 and she has one adult daughter. Her estate exceeds her NRB (£325,000) and she can claim the RNRB (£175,000) because the house passes to her daughter. Her total tax-free allowance is £500,000. The taxable estate is £400,000, producing an IHT bill of £160,000 (£400,000 × 40%). With planning, that bill can potentially be reduced significantly; the sections below explain how.

Four rules before any planning

Be realistic. Never put tax savings ahead of maintaining the lifestyle you want. The best plan is one you can actually live with.

Be flexible. Circumstances, families and tax law all change; your arrangements should be able to change too. Rigid structures put in place years ago can cause problems if family relationships shift or legislation moves on.

Keep it simple. If a simple solution works, it is usually the best one. Complexity has a cost in professional fees, ongoing administration and the risk of things going wrong.

Write it down as you go. Almost every exemption on this page has to be evidenced by your executors after your death, at the one moment you are not there to explain it. The same plan with a paper trail is worth considerably more than the plan without one.

Lifetime gifts

Gifting assets during your lifetime is one of the oldest and most effective forms of IHT planning. The key is understanding which gifts are immediately exempt and which carry a seven-year survival requirement.

Immediately exempt gifts

The following gifts leave your estate at the moment you make them:

• Anything to your spouse or civil partner, without limit, provided they are UK domiciled or long-term UK resident.
• Anything to a UK charity, without limit.
• £3,000 a year, the annual exemption. If you did not use last year's, you can carry it forward one year only, so up to £6,000 in a single year.
• £250 to as many different people as you like, each tax year. You cannot combine this with the annual exemption for the same person.
• Wedding and civil partnership gifts: £5,000 to your child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else. Given before the ceremony.
• Regular gifts out of surplus income. Unlimited, and the most underused exemption there is. Three conditions: the gifts must form a regular pattern, they must come from income rather than capital, and you must still be able to maintain your usual standard of living afterwards. Keep a written record of your income and outgoings each year, because your executors will have to prove it.
• Maintenance payments to a former spouse, a dependent relative, or a child in full-time education.

Potentially exempt transfers (PETs)

Most other outright gifts to individuals, transferring cash, property or other assets directly to a person, are called potentially exempt transfers, or PETs. The word "potentially" is the key: the gift is fully exempt if you survive seven years from the date you make it. If you die within seven years, the gift is brought back into your estate for IHT purposes.

An important clarification: tax on the gift itself is only charged where the total value of gifts you have made in the seven years before death exceeds your £325,000 NRB. If your gifts in those seven years are below £325,000, no tax is charged on them even if you die; the effect is simply that those gifts use up part of your NRB, leaving less to set against the rest of your estate.

Where the seven-year gifts do exceed £325,000, taper relief reduces the tax on the excess, and the reduction gets larger the longer you survived after making the gift:

• Less than 3 years: no reduction. Effective rate 40%.
• 3 to 4 years: tax reduced by 20%. Effective rate 32%.
• 4 to 5 years: tax reduced by 40%. Effective rate 24%.
• 5 to 6 years: tax reduced by 60%. Effective rate 16%.
• 6 to 7 years: tax reduced by 80%. Effective rate 8%.
• 7 years or more: the gift falls out of your estate entirely.

Two points people get wrong. Taper relief reduces the tax, not the value of the gift. And it only applies at all where your gifts in the seven years before death exceed the nil rate band, because below that there is no tax for it to reduce.

Practical gifting checklist

• Write down every gift as you make it: the date, the amount, who received it, and which exemption you are relying on. Your executors will need this, and reconstructing it after your death is close to impossible.
• Keep a yearly record of income and expenditure if you are relying on gifts out of surplus income. HMRC form IHT403 asks for exactly this.
• Make the gift outright. If you keep any benefit from what you have given away, it is a gift with reservation of benefit and stays in your estate.
• Check the capital gains tax position first. Giving away an asset that has risen in value is a disposal, and can trigger a tax charge on you now to save tax later.
• Keep enough. Model what you will need for the rest of your life, including care, before you give anything away.
• Think about your beneficiary's circumstances. A large gift can affect means-tested benefits, and it is exposed to their divorce or bankruptcy once it is theirs.
• Use the exemptions before the seven-year gifts. Exempt gifts work immediately and need no survival period.
• Update your Will after significant gifts, so that the division you intended still happens.

How much Inheritance Tax could your estate face?

Get an instant estimate with our free calculator. Try the IHT Calculator →

The family home

The family home is often the biggest single asset in an estate, and one of the most emotionally loaded. It is also the hardest to plan around. Strategies exist, but each carries risks.

Equity release allows you to unlock value from your home without selling it, but it is a regulated financial product, and advice must come from an FCA-authorised adviser. Squiggle is an estate planning consultancy and does not provide financial advice. The IHT impact of equity release depends on how the released funds are then used.

Gifting the home and paying full market rent is sometimes suggested as a way to move the property out of your estate. HMRC scrutinises these arrangements closely. If you continue to benefit from the property (for example, by living in it rent-free or below market rate), the gift is likely to be a "gift with reservation of benefit", which means it stays in your estate for IHT purposes as if you had never given it away. If you do pay genuine market rent, that rent becomes income in your child's hands and creates its own tax consequences.

Co-ownership with a resident family member can sometimes work in genuine cases, for example, where a child has genuinely moved in and contributed to the purchase, but again, HMRC watches for arrangements that exist primarily for tax purposes.

The RNRB itself is often the simplest relief for the family home. Make sure your Will is drafted to use it effectively, and watch the £2 million taper if your estate is near that level. Note that the RNRB can still apply where you have downsized, there are specific "downsizing addition" rules.

One risk worth naming: "sideways disinheritance." Once your home passes to your children, whether on death or by lifetime gift, it is theirs. That means it can be exposed to their divorce, their bankruptcy, or their own estate if they die before you. A trust in your Will can protect against this, keeping the home (or its proceeds) within the family line even if your children's circumstances change.

Pensions, the rules have changed

Pension death benefits were, for many years, a famously IHT-efficient inheritance route. Many families built their estate plans around leaving pension funds untouched, living off other assets, and passing the pension pot to the next generation free of IHT.

That picture has changed decisively. For deaths from 6 April 2027, most unused pension funds and death benefits will fall within a person's estate for IHT. This is now law. Spouse and charity exemptions remain, meaning pension funds still pass between spouses without an IHT charge, but for wider inheritance they are now taxable like any other asset.

The practical implications are significant:

• Check your nomination of benefits forms. A form completed fifteen years ago may send your pension somewhere you no longer intend, and after April 2027 it may also send a tax bill with it.
• The old order of spending may be the wrong one. Many people were told to spend other savings and leave the pension untouched. For deaths from April 2027 that advice needs revisiting, though the income tax cost of drawing more pension now has to be weighed against the Inheritance Tax saved later.
• Spouse and charity exemptions still apply. Pension funds passing to a surviving spouse or civil partner, or to charity, remain exempt.
• Some benefits stay outside. Death in service benefits from a registered scheme and dependants' scheme pensions are excluded.
• There may be tax twice. Where the member dies at or after 75, the beneficiary also pays income tax on what they draw, on top of any Inheritance Tax.
• Your executors will have to deal with the scheme. Build that into your planning, and tell your executors which schemes exist.

Any decision about a pension is a regulated financial decision. Take it with an FCA-authorised adviser.

This is one area where specialist, personal advice is essential. The right response depends on the size of your pension, your other assets, your family structure and your income needs in retirement. Please do not make changes to your pension without taking advice from an FCA-authorised financial adviser (for investment decisions) and an estate planning specialist.

Trusts: the established toolkit

Trusts (legal arrangements where assets are held by one person, the trustee, for the benefit of others, the beneficiaries) have been a cornerstone of IHT planning for decades.

The right trust depends on your age, health, income needs and overall estate. In outline:

• Discretionary trust. Trustees decide who benefits and when, within a class you set. The most flexible, and the most common in Wills. Set up during your lifetime, it is a chargeable lifetime transfer with an immediate 20% charge on anything above your available nil rate band, plus ten-year and exit charges.
• Life interest trust. One person, often a surviving spouse, has the income or the right to live in the property; the capital passes to others afterwards. The standard answer to second marriages and blended families.
• Bare trust. The beneficiary is absolutely entitled and takes the assets at 18. Simple, but with no protection at all once they do.
• Trusts for disabled or vulnerable beneficiaries. Special tax treatment, and they protect means-tested benefits.
• Trusts for children under 18 in a Will, holding a legacy until they are old enough.

Every trust carries obligations: registration with HMRC's Trust Registration Service, trustee decisions properly recorded, accounts, and sometimes tax returns. We will set out the running costs before you decide.

Common mistakes with trusts

Mistake 1: Setting up a trust and then ignoring it. Trusts require ongoing administration, trustee meetings, proper decision-making, accounts and sometimes tax returns. An abandoned trust can be ineffective or create problems.

Mistake 2: Choosing trustees without thinking it through. Trustees have legal duties and can be held liable for poor decisions. Choose people who are organised, trustworthy and, ideally, not all in the same household.

Mistake 3: Using trusts without reviewing the rest of the plan. A trust is one piece of the jigsaw. It needs to sit alongside your Will, your LPA, your pension nominations and your life cover to be truly effective.

Tax-favoured investments, 2026 changes

Certain investments carry statutory IHT reliefs after a qualifying period. These reliefs changed significantly from April 2026.

Business Relief (BR) applies to shares in qualifying unlisted trading companies, certain partnership interests, and shares listed on AIM (the Alternative Investment Market, which lists smaller, growing companies). Agricultural Relief (AR) applies to agricultural land and property used for farming.

From April 2026, the rules were reformed. Each person now has a £2.5 million combined allowance for assets qualifying for 100% BR or AR. Above that £2.5 million allowance, the relief reduces to 50%, meaning half the value above that threshold is still chargeable to IHT.

AIM shares used to attract 100% Business Relief after two years of ownership. Since April 2026 they attract 50% relief instead, in every case, however large or small the holding. They also sit outside the £2.5 million allowance entirely, so an AIM holding neither uses up the allowance nor benefits from it.

Enterprise Investment Scheme (EIS): EIS shares in genuinely unquoted trading companies can qualify for Business Relief after two years of ownership, within the £2.5 million allowance, with 50% relief above it. EIS shares in a company traded on AIM are treated as AIM shares: flat 50% relief, outside the allowance. Which category a particular holding falls into is a question of fact about that company.

Any unused part of the £2.5 million allowance is transferable to a surviving spouse or civil partner, giving a couple up to £5 million of 100% relief between them. How best to use it still needs specialist advice.

Important: Squiggle does not provide investment advice. Decisions about AIM portfolios, EIS investments or other tax-favoured investment structures must be made with an FCA-authorised financial adviser. Capital is at risk with all investments, and the availability of tax reliefs depends on individual circumstances and the investment meeting qualifying conditions at all relevant times. Tax reliefs may change.

A worked example: BR in practice

Imagine Robert, who owns a 30% shareholding in an unlisted trading company worth £800,000 and holds a qualifying AIM portfolio worth £1.8 million. These are treated differently. The unlisted shareholding qualifies for 100% relief within his £2.5 million allowance, so no Inheritance Tax arises on it, and it uses £800,000 of the allowance, leaving £1.7 million available for other qualifying business or agricultural property. The AIM portfolio is treated separately: since April 2026, shares traded on AIM attract 50% relief in every case and do not draw on the £2.5 million allowance. Half of the £1.8 million, £900,000, is therefore chargeable. At 40%, the tax on that portion is £360,000. Before April 2026 the same portfolio would have attracted 100% relief. Robert should review his overall estate in light of the reformed rules and discuss whether any restructuring makes sense with an FCA-authorised financial adviser and his estate planner.

Property portfolios and larger estates

For those with substantial property portfolios or larger estates, more complex structures may be appropriate. These are not solutions for everyone (they require time, professional input and ongoing management), but they can be highly effective in the right circumstances.

Incorporation: transferring a genuinely managed lettings business into a limited company. If the properties genuinely constitute a trading business (rather than passive investment letting), the transfer may be possible with a capital gains tax rollover, and the company structure opens the door to further planning. However, stamp duty land tax, existing mortgage restrictions, lender consents and HMRC's view of whether a "business" (rather than mere investment) actually exists all need careful checking beforehand.

Family Limited Partnerships (FLPs): a partnership structure into which you contribute assets. You retain management control as general partner (and thus control the assets and income), while gradually gifting partnership interests to family members over time. The interests typically attract a valuation discount because of the restrictions on minority partners, which can reduce the value being transferred for IHT purposes. Complex, and depending on how it is structured an FLP can amount to a collective investment scheme, which brings its own regulatory consequences. Professional legal and accounting input is essential throughout.

Family Investment Companies (FICs): a private limited company set up to hold family wealth (investments, cash, property). You typically hold "alphabet" or preference shares as director, retaining control and income rights, while family members hold shares that carry the growth. Useful for families wanting to pass wealth down while retaining control. It is a company, with everything that involves: annual accounts, corporation tax returns, a shareholders' agreement and ongoing professional fees. Those costs mean it only makes sense for substantial estates, and the threshold depends entirely on the assets involved. Anyone considering one should get the running costs modelled before deciding.

These structures are complex, highly technical, and take specialist knowledge and time to set up properly. They also require ongoing professional input. They are mentioned here so you know they exist, not as DIY options.

Quick wins worth remembering

Sometimes the best Inheritance Tax planning is the simplest. A few points worth keeping in mind:

• Use the £3,000 annual exemption every year. A couple doing this for twenty years moves £120,000 out of their estates, with no seven-year wait and no paperwork beyond a note of it.
• Start the record-keeping for gifts out of income now. The exemption is unlimited and it is lost more often through missing evidence than through failing the test.
• Make sure both Wills use the residence nil rate band. Leaving the home into the wrong sort of trust can lose £175,000 of allowance for nothing.
• Claim the transferable nil rate band on the second death. It is not automatic; it has to be claimed, and it is missed more often than you would think.
• Check the downsizing addition if you have sold or moved to a smaller home since 8 July 2015. The allowance may still be available.
• Look at the 36% charity rate if you are already leaving something to charity. Taking the gift to 10% of the net estate cuts the rate on everything else from 40% to 36%, and can cost the family very little.
• Review after every major life event, and otherwise every two or three years.

Common mistakes in IHT planning

Waiting too long. The seven-year clock on PETs, the need for ongoing gifts out of income, and the time to set up trusts all mean that delay costs real money. Starting sooner gives more options.

Planning in isolation. IHT planning that ignores the Will, the pension nominations and the LPA is incomplete. A gift that reduces IHT can inadvertently disinherit someone if the Will is not updated to reflect it.

Giving away too much. People sometimes give away so much that they become dependent on their children. That creates family tension and, if the child then divorces or faces bankruptcy, can leave the parent without the assets they relied on.

Ignoring the RNRB taper. Estates just above £2 million can lose the RNRB entirely. Strategic lifetime gifts or charitable bequests may bring the estate back under the threshold, but this needs careful modelling.

Not reviewing after major life events. Marriage, divorce, birth of grandchildren, a business sale, a property purchase, a change in pension value, all of these can significantly alter the IHT picture. Your estate plan should be reviewed every two to three years and after any major change.

Overlooking pension nominations. With pensions coming into IHT from April 2027, outdated nomination of benefits forms could produce unintended results. Review them now.

Questions? Book a free call

Pick a time that suits you and your local Squiggle consultant will call you. No charge, no obligation. Book a call or call 01233 659 796.

Talk to Squiggle: 01233 659 796 | hello@squiggleconsult.co.uk | www.squiggleconsult.co.uk | Book a free call: meet.squiggleconsult.co.uk

Every strategy here depends on personal circumstances; take professional advice before acting.

This factsheet is general information for England and Wales, not legal, tax or financial advice. Worked examples are hypothetical and for illustration only. Last reviewed: August 2026.