TRW & Co · Wills, probate and private wealth
Inheritance Tax Planning: Practical Strategies for 2026
Inheritance tax planning reduces the 40% charge on estates above the £325,000 nil-rate band. The main tools are the residence nil-rate band, spouse and charity exemptions, lifetime gifts that survive seven years, trusts, and business and agricultural relief, now capped at £2.5 million of 100% relief. Thresholds are frozen to 2031 and most pensions enter the estate from April 2027.
Key pointRegular gifts from surplus income are the most underused exemption: unlike outright gifts, they escape inheritance tax immediately with no upper limit and no seven-year wait, provided they are habitual, made from income and well documented.
At a glance
Thresholds frozen to 2031
The £325,000 nil-rate band and the residence nil-rate band stay frozen until 5 April 2031 under the Finance Act 2026.
Up to £1 million tax-free
A married couple leaving a home to direct descendants can combine two nil-rate bands and two residence nil-rate bands, subject to the £2 million taper.
Seven-year rule
Outright gifts escape tax if the donor survives seven years; taper relief reduces tax on larger gifts made three to seven years before death.
£2.5 million relief cap
Since 6 April 2026, 100% business and agricultural relief applies only to the first £2.5 million of qualifying property, with 50% above.
Pensions from April 2027
Certain unused pension funds and death benefits will be brought into the estate for deaths on or after 6 April 2027.
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The short answer: what inheritance tax planning can achieve
Inheritance tax planning means arranging your affairs during life and in your will so that less of your estate is lost to the 40% charge on death. In the UK the main tools are the nil-rate band and residence nil-rate band, the spouse and charity exemptions, lifetime gifts that survive seven years, trusts, and the reliefs for business and agricultural property.
The numbers that matter most are fixed for some years. The nil-rate band is £325,000 and the residence nil-rate band can take the tax-free threshold to £500,000 when a home passes to children or grandchildren. Finance Act 2026 extends the freeze on these thresholds to 5 April 2031, so rising asset values pull more estates into charge each year.
Two reforms have changed the landscape. Since 6 April 2026, 100% business and agricultural property relief is capped at £2.5 million per person. From 6 April 2027, most unused pension funds and death benefits will be brought within the estate. This guide sets out practical strategies as of October 2026.
The framework: how inheritance tax works
Inheritance tax is charged under the Inheritance Tax Act 1984 and administered by HMRC. On death, tax is charged at 40% on the value of the estate above the available thresholds. Gifts made in the previous seven years are added back first and use up the nil-rate band before the estate does.
According to GOV.UK guidance, there is normally no inheritance tax to pay if the estate is below £325,000, or if everything above that threshold passes to a spouse, civil partner, charity or community amateur sports club. If 10% or more of the net estate is left to charity, the rate on some assets falls to 36%.
The nil-rate bands
Each person has a nil-rate band of £325,000. The residence nil-rate band adds up to £175,000 when a home, or a share of one, passes to direct descendants, including adopted, foster and stepchildren and grandchildren. It is gradually withdrawn for estates worth more than £2 million. Any unused proportion of either band can be transferred to a surviving spouse or civil partner, so a married couple can pass on up to £1 million free of tax. HMRC's rates and thresholds table records the frozen figures to 2031.
Residence, not domicile
Since 6 April 2025, exposure to UK inheritance tax on worldwide assets depends on long-term UK residence rather than domicile. Broadly, a person who has lived in the UK for at least 10 of the previous 20 tax years is within scope on their worldwide estate. Others pay only on UK assets. Our guide to the new residence-based regime explains the transition.
Practical inheritance tax planning strategies compared
No single strategy suits everyone. The right mix depends on the size and type of assets, the family's income needs, health and age, and how much control the donor wants to keep.
| Strategy | How it saves tax | Main trade-off |
|---|---|---|
| Annual and small-gift exemptions | £3,000 a year (one year's carry-forward) and gifts of up to £250 per person fall outside the estate immediately | Modest amounts; must be used each tax year |
| Normal expenditure out of income | Regular gifts from surplus income are exempt with no upper limit | Requires a pattern of giving and careful records of income and spending |
| Outright gifts (potentially exempt transfers) | Fall outside the estate if the donor survives seven years; taper relief reduces tax on larger gifts after three years | Loss of control and access; capital gains tax may arise on non-cash assets |
| Gifts into trust | Value leaves the estate after seven years while trustees keep control | Lifetime charge of 20% above the nil-rate band, plus ten-year and exit charges |
| Business and agricultural relief | 100% relief on the first £2.5 million of qualifying property, 50% above | Assets must qualify and be held for the minimum period |
| Charitable legacies | Exempt, and 10% or more of the net estate cuts the rate to 36% on relevant assets | Less passes to family; wording must meet the conditions |
| Life insurance written in trust | Funds the tax bill without increasing the estate | Premiums; cover must be placed while insurable |
Lifetime gifts and the seven-year rule
Outright gifts to individuals are potentially exempt transfers. If the donor survives seven years, the gift falls out of account entirely. If they die within seven years, the gift uses up the nil-rate band first, and any tax on a gift made three to seven years before death is reduced by taper relief, from 32% down to 8%. Taper relief only helps where the gifts themselves exceed the nil-rate band.
The trap is the gift with reservation of benefit. If you give away your home but keep living in it rent-free, or give away a painting but keep it on your wall, the asset is treated as still yours for inheritance tax. Paying a full market rent, or sharing occupation with the recipient in limited cases, can avoid the rule. Our guide to gifts and the seven-year rule goes further.
Wedding gifts are also exempt within limits: £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else. For families with surplus income, regular gifts out of income are often the most powerful exemption of all, because there is no cap and no seven-year wait, provided the donor's standard of living is maintained.
Using trusts in inheritance tax planning
Trusts let a donor move value out of their estate while trustees decide when and how beneficiaries receive it. That makes them useful where children are young, a beneficiary is vulnerable, or the family wants to protect wealth from divorce or creditors.
Most lifetime trusts fall within the "relevant property" regime. HMRC guidance explains that transfers into trust above the nil-rate band are taxed at 20% when made, rising to the full 40% if the settlor dies within seven years. The trust then faces charges on each ten-year anniversary and when assets leave the trust. A settlor can usually put up to the available nil-rate band into trust every seven years without an immediate charge.
Trusts created by will can also be valuable, for example to give a surviving spouse income for life while preserving capital for children from an earlier relationship. Most trusts must be registered on HMRC's Trust Registration Service. Our trusts team advises trustees and settlors on structure and compliance, and some families use family investment companies as an alternative.
The 2026 and 2027 reforms
Business and agricultural property relief
Under Schedule 12 to the Finance Act 2026, from 6 April 2026 business property relief and agricultural property relief are given at 100% only on the first £2.5 million of combined qualifying property, with 50% relief above that. The allowance is shared across lifetime transfers and the estate, and an unused allowance can pass to a surviving spouse or civil partner. Shares designated as not listed on a recognised stock exchange, such as many AIM shares, attract 50% relief. See our guide to business property relief reform.
Pensions
Section 71 of the Finance Act 2026 confirms that new rules bringing certain pension interests into charge apply to deaths on or after 6 April 2027. Pensions were often the last asset people drew on because they sat outside the estate; that logic now needs revisiting. Our guide to pensions and inheritance tax explains who is liable and how payment will work.
How to build an inheritance tax plan, step by step
Good inheritance tax planning follows a sequence. Skipping the early steps is how families end up with expensive structures that solve the wrong problem.
- Map the estate. List every asset, how it is owned and where it is located, including pensions, life policies, business interests and overseas property. Note any gifts made in the last seven years.
- Model the tax today and after April 2027. Apply the nil-rate bands, the residence nil-rate band and its taper, the relief allowance for business and farm assets, and the pension changes.
- Set income and control needs. Decide how much capital and income you need for life, including care costs. Inheritance tax planning should never leave the donor short.
- Use exemptions first. Annual, small-gift, wedding and income exemptions cost nothing in tax and need no survival period.
- Choose larger strategies. Decide between outright gifts, trusts, a family investment company or insurance, considering capital gains tax and stamp duty land tax on each transfer.
- Align the will and nominations. Update the will, pension nominations and policy trusts so they work with the lifetime plan.
- Document and review. Keep a gift schedule, register trusts where required and review the plan every few years or after major life events.
The residence nil-rate band is withdrawn above £2 million, so as an estate rises above that level it progressively loses a band worth up to £70,000 per person in tax. Lifetime gifts, charitable legacies or pension decisions that bring the estate below the taper point often deliver a disproportionate saving.
An illustrative scenario
This example is illustrative only and does not describe a real client. A widow in south-west London owns a home worth £1.1 million and investments of £600,000. Her late husband left everything to her, so his nil-rate band and residence nil-rate band are unused. Her estate is £1.7 million, below the £2 million taper point.
With two nil-rate bands of £325,000 and two residence nil-rate bands of £175,000 leaving the home to her children, £1 million is tax-free. The remaining £700,000 would bear tax at 40%, a bill of £280,000.
With advice, she gives £200,000 to her children now, using surplus investments she does not need. She starts regular gifts from her pension income, documented each year. She leaves a charitable legacy in her will and puts a whole-of-life policy in trust to cover part of the remaining exposure. If she survives seven years, the £200,000 gift alone removes £80,000 of potential tax, and her income gifts are exempt from the outset.
Risks and common mistakes
Giving away the home but still living there
This is the classic gift with reservation of benefit. Transferring the house to children while continuing to live in it rent-free leaves its value in the estate for inheritance tax, and the children lose the main residence exemption from capital gains tax on a later sale. It can also expose the property to the children's divorces and debts. If a home is to be gifted, the donor generally needs to move out, pay a full market rent or rely on a narrow shared-occupation exception.
Losing the residence nil-rate band
The residence nil-rate band only applies where a home passes to direct descendants. Leaving the estate to a discretionary trust, to nephews and nieces, or to a sibling can forfeit it. It is also withdrawn for estates over £2 million, so lifetime gifts that bring the estate below that level can restore it. Downsizing rules can preserve the band where a larger home was sold, but they require careful records. Review the will to make sure it does not accidentally waste this relief.
Poor records of gifts
Executors must report gifts made in the seven years before death, and the normal expenditure out of income exemption depends on evidence that the gifts were regular, made from income and left the donor's standard of living intact. Without records, HMRC may deny the exemption and add the gifts back. Keep a simple schedule of each gift, the date, the recipient, the value and the source of funds, and update it every tax year.
Planning in isolation
Inheritance tax planning interacts with capital gains tax, income tax, stamp duty land tax and, for families with assets overseas, foreign succession and tax laws. A gift of shares may trigger a gain; a trust may change the income tax position; a foreign property may be taxed twice. Plans that ignore these interactions can cost more than they save. Coordinate the will, lifetime gifts, pensions and any trusts as one strategy.
Cross-border families and Bangladesh assets
For long-term UK residents, worldwide assets fall within UK inheritance tax, including land and bank accounts in Bangladesh. Local succession law, registration formalities, any local transfer costs and Bangladesh's exchange controls also affect how those assets pass and how proceeds can be brought to the UK, so the UK tax position is only half the analysis. Our guide to UK inheritance tax on Bangladesh assets explains valuation, reporting and planning points.
Families moving to or leaving the UK should model when they become, or cease to be, long-term residents. The tail of exposure after leaving can last several years, so timing gifts and trust settlements around residence changes is a central part of international planning.
Inheritance tax planning checklist
- Value your estate, including pensions, and model the position before and after April 2027.
- Check that your will preserves the residence nil-rate band and uses the spouse exemption sensibly.
- Use the annual, small-gift and wedding exemptions every year.
- Set up documented regular gifts from surplus income where affordable.
- Consider larger gifts early, and insure against death within seven years.
- Review business and farming assets against the £2.5 million relief allowance.
- Consider trusts where control or protection matters more than simplicity.
- Revisit the plan after any change in residence, marriage, business sale or health.
TRW & Co's London office provides inheritance tax planning for families, entrepreneurs and internationally mobile clients through our private client team, working with tax advisers and our Dhaka colleagues where assets are in Bangladesh. To start, contact us: email info@trw.co, call +880 1779 127165, or visit Holborn Gate, 330 High Holborn, London WC1V 7QH.
Frequently asked questions
01What is the inheritance tax threshold in 2026?
The nil-rate band is £325,000 per person. The residence nil-rate band can add up to £175,000 where a home passes to children or grandchildren, taking the threshold to £500,000, and it is withdrawn gradually for estates over £2 million. Unused allowances transfer to a surviving spouse or civil partner, so a couple can pass on up to £1 million. The Finance Act 2026 extends the freeze on these thresholds until 5 April 2031.
02How does the seven-year rule work for gifts?
An outright gift to an individual is a potentially exempt transfer. If the donor lives for seven years, it is outside the estate for inheritance tax. If they die sooner, the gift is added back and uses the nil-rate band first. Where tax is due on gifts made between three and seven years before death, taper relief reduces the rate on a sliding scale from 32% to 8%. Gifts into most trusts are treated differently and may be taxed immediately.
03Can I give my house to my children to avoid inheritance tax?
You can, but if you continue living there without paying a full market rent, the house is treated as a gift with reservation and stays in your estate for inheritance tax. Your children may also face capital gains tax when they sell, because the home is not their main residence. A gift of the home generally works only if you move out, pay a market rent, or share occupation with the children under narrow conditions. Take advice before transferring a property.
04How does leaving money to charity reduce inheritance tax?
Gifts to UK-qualifying charities are exempt from inheritance tax, whether made during life or in a will. In addition, if you leave at least 10% of your net estate to charity, the rate of inheritance tax on the relevant part of the estate falls from 40% to 36%. For some estates, a slightly larger charitable gift leaves the family with almost the same amount, because the tax saving offsets much of the cost. The will must be worded carefully to meet the conditions.
05What changed for business and farm owners in April 2026?
From 6 April 2026, 100% business property relief and agricultural property relief apply only to the first £2.5 million of combined qualifying property per person, with 50% relief on value above that. The allowance covers both lifetime transfers and the estate, and an unused allowance can be transferred to a surviving spouse or civil partner. Shares not listed on a recognised stock exchange, such as many AIM shares, receive 50% relief. Owners should review succession plans and insurance.
06Will my pension be subject to inheritance tax?
For deaths on or after 6 April 2027, the Finance Act 2026 brings certain unused pension funds and death benefits within the scope of inheritance tax. Before that date, most defined contribution pensions passed outside the estate, which made them a popular way to pass wealth on. Anyone who planned to leave their pension untouched should review drawdown, gifting and life cover now, and check nominations with their pension scheme.
Sources and official materials
- GOV.UK: Inheritance Tax — Thresholds, rates, gifts, the seven-year rule and taper relief
- HMRC: Inheritance Tax thresholds and interest rates — Historic and frozen thresholds to 5 April 2031
- Finance Act 2026, Schedule 12 — £2.5 million 100% relief allowance for APR and BPR
- Finance Act 2026, section 71 — Pension interests within inheritance tax from 6 April 2027
- HMRC: Trusts and Inheritance Tax — Relevant property regime, entry, exit and ten-year charges
- Inheritance Tax Act 1984 — Primary legislation for inheritance tax
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.