How can I plan ahead to reduce future Inheritance Tax?

This guide explains how to plan ahead to reduce future Inheritance Tax including gifting, allowances, pensions, trusts, business relief, spousal planning and the residence nil rate band.

Inheritance Tax is one of the most debated parts of the UK tax system. Many families feel that their assets have already been taxed once and they want to make sure as much as possible passes to their loved ones rather than to HMRC. In my opinion the key to reducing or even eliminating future Inheritance Tax is to plan early. Most reliefs only work if they are set up ahead of time. By the time someone passes away, options are limited. With careful planning you can protect your estate, make full use of the allowances available and ensure that your wealth goes where you want it to go.

This guide explains the most effective ways to plan ahead to reduce future Inheritance Tax. I cover allowances, gifts, trusts, property planning, pensions, business reliefs, charitable strategies and the practical steps I believe every family should consider. Whether you have a modest estate or significant wealth, the principles are the same: act early, understand the rules and structure your affairs in a tax efficient way that matches your goals.

First: understand how Inheritance Tax works

Inheritance Tax (IHT) is charged at 40 percent on the value of an estate above the combined allowances available.

The key allowances are:

Nil Rate Band

  • £325,000 per person

  • Transferable between spouses or civil partners

Residence Nil Rate Band

  • £175,000 per person

  • Available when leaving a home to children or grandchildren

  • Also transferable

This means a married couple can potentially protect £1 million from IHT if they use both allowances fully.

Any value above the available allowances is taxed at 40 percent unless a relief or exemption applies.

In my opinion understanding these starting allowances is essential because every other strategy builds on them.

How to plan ahead to reduce future Inheritance Tax

Below are the most effective strategies used in legitimate estate planning. The best results come from using several of these methods together.

1. Make use of the nil rate band and residence nil rate band

As a couple you can maximise tax free allowances by:

  • Leaving everything to your spouse on first death

  • Passing a qualifying home to direct descendants

  • Ensuring both nil rate bands and residence nil rate bands are transferable

  • Keeping your estate below £2 million if you want to protect the residence nil rate band (it tapers above this level)

Planning tip

If your estate is close to £2 million, even modest gifting can preserve the residence nil rate band for your family and save significant tax.

2. Use lifetime gifts to reduce the taxable estate

Gifting is one of the strongest ways to reduce IHT but you must understand the rules.

Two types of gifts:

1. Exempt gifts

These do not form part of the estate.

They include:

  • £3,000 annual gift allowance

  • £250 small gifts to unlimited people

  • Wedding gifts

  • Income gifted regularly and sustainably (the often forgotten “normal expenditure out of income” exemption)

  • Gifts between spouses

2. Potentially exempt transfers (PETs)

These are gifts of any size to individuals.

They become entirely tax free after seven years.

If you die within seven years taper relief may reduce the tax.

In my opinion

Gifting early is one of the simplest ways to reduce future IHT. The seven year rule is the biggest reason not to delay planning.

3. Use “normal expenditure out of income” to pass on wealth tax free

This is one of the most powerful and underused IHT exemptions.

It allows you to gift unlimited amounts as long as:

  • The gift comes from surplus income

  • The gifts are regular

  • The gifts do not affect your standard of living

Example

If your income exceeds your living needs by £1,000 a month and you gift it to children monthly, these gifts are immediately IHT exempt and do not require the seven year clock.

In my opinion this exemption is a game changer for wealthier families.

4. Consider gifting assets into trust

Trusts can protect assets, control who receives them and reduce IHT but they must be set up carefully.

Common trust options include:

Discretionary trusts

  • Good for flexibility

  • Potential 20 percent entry charge if over £325,000

  • Require ongoing administration

Bare trusts

  • Simple

  • Assets belong to the beneficiary outright at 18

Interest in possession trusts

  • Beneficiary receives income

  • Capital preserved for someone else

In my opinion

Trusts work best when you need control, such as protecting assets for children, vulnerable beneficiaries or blended families.

5. Leave money to charity

Charitable giving can reduce and even eliminate IHT.

How it works:

If you leave 10 percent or more of your estate to charity

Your IHT rate drops from 40 percent to 36 percent.

All gifts to charity are 100 percent IHT exempt

This can reshape the effective tax rate on the remaining estate.

In my opinion charitable giving is both tax efficient and emotionally meaningful for many families.

6. Use pensions as an IHT planning tool

Pensions sit outside your estate for Inheritance Tax purposes.

This makes them one of the most tax efficient wealth transfer vehicles in the UK.

Key points:

If you die before age 75

Your beneficiaries can receive your pension tax free.

If you die after 75

Beneficiaries pay income tax on withdrawals but no IHT.

Planning tip

It can be wise to spend non-pension assets first and preserve pension wealth for inheritance.

In my opinion pensions are undervalued as long term estate planning tools.

7. Consider life insurance written in trust

Life insurance can be a strategic way to cover future IHT costs.

Benefits of writing it in trust:

  • The payout does not form part of your estate

  • Funds are available quickly to pay tax

  • Beneficiaries receive the money outside probate

  • Can be used to settle IHT without selling assets

In my opinion many families underestimate the value of life insurance as an IHT funding tool.

8. Use business relief if you own a business or certain investments

Business relief can reduce the taxable value of qualifying assets by:

  • 100 percent
    or

  • 50 percent

Qualifying assets include:

  • Shares in qualifying unlisted trading companies

  • AIM shares

  • Certain business property

  • Some types of partnerships

To qualify, assets usually must be held for two years.

In my opinion business relief is extremely powerful for entrepreneurs and investors.

9. Review how your property is owned

Property ownership structure affects IHT and who inherits.

Two common structures:

Joint tenants

  • Property passes automatically to the surviving spouse

  • Simpler but less flexible for estate planning

Tenants in common

  • Allows you to pass your share to someone other than your spouse

  • Useful for trusts and blended families

  • Helps preserve the residence nil rate band

Reviewing property ownership can ensure correct use of allowances.

10. Use spousal transfers wisely

Spouses and civil partners can transfer assets to each other free of inheritance tax.

This helps:

  • Equalise estates

  • Use both nil rate bands

  • Use both residence nil rate bands

  • Lower estate value below the £2 million taper threshold

In my opinion equalising estates before death is one of the simplest ways to preserve allowances.

11. Review your will regularly

A well structured will can significantly reduce IHT.

You should review your will when:

  • You marry or divorce

  • You have children

  • You move home

  • Your assets increase

  • You receive an inheritance

Your will should be aligned with your estate planning goals and current tax rules.

12. Keep detailed records of gifts

Gifts need records to prove they were made and how they were treated for tax.

Keep track of:

  • Dates

  • Amounts

  • Purpose

  • Whether they were from income or capital

This helps executors claim available exemptions.

13. Consider long term care planning

Care costs can rapidly reduce the value of an estate.

Though you cannot intentionally deprive assets to avoid care charges, early planning allows:

  • Use of trusts

  • Asset restructuring

  • Insurance for care costs

In my opinion responsible IHT planning should consider future care needs.

14. Avoid accidental IHT traps

Common traps include:

Gifting a property but continuing to live in it

This becomes a “gift with reservation” and remains part of your estate unless you pay full market rent.

Gifts made shortly before death

These may still be taxable if within seven years.

Leaving everything to someone other than a spouse

This can waste allowances unless planned properly.

Not understanding the taper on estates above £2m

This can remove the residence nil rate band unless the estate is brought below the threshold.

In my opinion these traps catch people out simply because they do not seek advice early.

Real world examples

Example 1: Using allowances efficiently

John and Mary own a £900,000 estate. They leave everything to each other on first death then to children. By using both nil rate bands and both residence nil rate bands their children inherit the full £900,000 tax free.

Example 2: Gifting early

Alan gifts £200,000 to his children at age 65. He lives another 10 years. The gift becomes completely IHT free because he survived the seven year rule.

Example 3: Using pensions

Sarah has £400,000 in pension funds and £400,000 outside pensions. She spends her non-pension assets in retirement. Her pension passes to her children outside her estate, reducing IHT significantly.

Example 4: Using business relief

Claire owns shares in an AIM portfolio qualifying for business relief. These are exempt from IHT after two years. Her estate reduces from £850,000 to £450,000 for IHT purposes.

Example 5: Normal expenditure out of income

David earns £90,000 and consistently saves £1,500 a month more than he needs. He gifts the surplus monthly to his children and shows it does not affect his lifestyle. All these gifts escape IHT immediately.

In my opinion: where most people get the biggest savings

If I were to highlight the most effective strategies I see in real life they would be:

  1. Using both nil rate bands and both residence nil rate bands correctly.

  2. Gifting early and using the seven year rule.

  3. Using the normal expenditure out of income exemption.

  4. Making pensions central to long term planning.

  5. Equalising estates between spouses.

  6. Using business relief where available.

  7. Ensuring wills reflect the desired tax treatment.

In my opinion these strategies offer the biggest impact for families trying to reduce IHT.

Final thoughts

Inheritance Tax planning is most effective when done early. By understanding the available allowances, reviewing your will, making strategic gifts, structuring your property correctly, using pensions wisely and making the most of spousal reliefs you can significantly reduce or even eliminate future IHT. The key is to plan well before the estate becomes taxable. Most reliefs take time to work and the seven year gifting rule alone makes early action essential.

In my opinion every family should review their estate plan at least once every two years to ensure it still fits their circumstances and uses the most tax efficient strategies. Good planning protects not only your wealth but also your peace of mind.