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Although the majority of estates are not liable for inheritance tax (IHT), the tax is affecting rising numbers of people, since allowances are frozen until at least 2030. Even more estates will be affected once unspent pension pots come under the scope of inheritance tax from April 2027.
IHT planning can be even more important if you’re unmarried, as well as if you don’t have children, as fewer exemptions apply.
This guide explains your options and how to keep your IHT bill to a minimum.
What’s on this page?1. The first step in inheritance tax planning is to assess the value of your estate, including property, savings, investments, and pensions, and compare this with the current IHT thresholds – how much you can pass on before IHT may be applied.
If you’ve built up a substantial defined contribution pot, you need to remember that from April 2027 any unspent pension will be liable for IHT, if the total value of the estate (including pension) is above the IHT threshold.
If you’re unmarried or divorced without children, your IHT allowance is limited to £325,000, with anything above this potentially subject to IHT at 40% when passed on.
This compares to a married or civil-partnered couple with children, who could pass on up to £1 million before IHT is charged, because the first of them to die can pass all their property and their IHT allowance to the surviving spouse.
Steve Bish, estate planning expert and author of Where There’s a Will There’s a Way, says: “Much of the UK’s IHT system favours passing wealth to direct descendants. Without children, that route is closed, yet there are still effective ways to protect what you’ve built.”
Bish warns that many people don’t realise they lose the residence nil rate band (RNRB), worth £175,000, if they have no children. “This allowance only applies when a home passes to direct descendants such as children or grandchildren,” he says.
The table below shows how IHT hits your estate much harder if you don’t have children, as well as if you are unmarried or divorced. This is a simple illustration without taking other allowances into account.
| Estate value | IHT due if no RNRB (if you are unmarried or divorced with no children) | IHT due with RNRB (if you are unmarried or divorced and leave your home to children) | IHT due for married couple leaving the home to children |
|---|---|---|---|
|
£400,000 |
£30,000 |
£0 |
£0 |
|
£500,000 |
£70,000 |
£0 |
£0 |
|
£750,000 |
£170,000 |
£100,000 |
£0 |
|
£1 million |
£270,000 |
£200,000 |
£0 |
|
£1.5 million |
£470,000 |
£400,000 |
£200,000 |
It’s important to think carefully about who you want to benefit from your estate when you die – whether that’s friends or family members, such as siblings, cousins, or a niece or nephew.
A valid will is essential for ensuring your wishes are carried out, says Eleanor Evans, a partner at law firm Hugh James.
“Without a will, the rules of intestacy will apply, meaning any surviving relatives inherit according to a strict order of priority. This can lead to outcomes that do not reflect your intentions, especially if you have only distant relatives or none at all, in which case your estate would pass to the Crown,” she explains.
You can also use your will to cover practical matters, including who should take care of any pets. You may wish to leave the intended caregiver a financial gift in your will to support them – but you can’t leave money to your pet.
It’s worth being aware that if you are separated but not actually divorced, your separated partner may have a claim against your estate. In Scotland, this can apply even if you have a will in place that stipulates your money should go elsewhere.
To reduce the potential impact of IHT on money left to your beneficiaries, there are several gifting allowances that can reduce the size of your estate.
Each tax year you can give away £3,000 a year without it being added to your estate for IHT purposes (the annual exemption), explains Paislei Godley, director and tax specialist at Prime Accountants Group.
“If the exemption is unused, it can be carried forward into the next tax year, so you can give away £6,000 – though it can’t be carried any further forward,” she says.
On top of this, you can gift up to £250 per person, per tax year, provided you haven’t used any other exemption for the same person. IHT exemptions also apply to wedding gifts, allowing you to give up to £1,000 tax-free (there are even larger allowances for wedding gifts to a child or grandchild).
Gifts above these limits are known as “potentially exempt transfers”. Larger gifts can be a great way to move assets out of your estate and into the hands of those you wish to benefit, but only if you live long enough.
Kathryn Smith Cowap, partner at law firm Wansbroughs, explains: “You do need to bear in mind that unless you survive seven years from making the gift, the value of the gift will be brought back into account on your death,” she says.
If you die between three and seven years after making the gift, any IHT due on the slice of the gift that exceeds £325,000 is reduced on a sliding scale.
If you have a partner who you’re not married to or in a civil partnership with, tying the knot could bring substantial savings if your estate might be liable for IHT.
It’s possible to give away large amounts on a regular basis through the exemption for making regular gifts out of surplus income. This exemption means there is no limit on the amount you can give, as long as:
1. it doesn’t affect your standard of living
2. it’s a regular gift
3. the money comes from income not capital.
Smith Cowap says: “If you do find that you’ve got more income than you need and can cover all of your outgoings without dipping into capital, then this is an extremely powerful exemption.”
Make sure you keep records of large gifts or regular gifts in case your executors need them later.
Property is often the most valuable part of your estate, so it needs careful planning. That is particularly important if you don’t have children, as it means your estate cannot use the extra £175,000 allowance for the residence nil rate band, which is only for a home passed to direct descendants.
Downsizing or equity release can be ways to reduce the value of your estate, and therefore the amount that is subject to IHT. These strategies will only work if you spend or give away at least some of the money that you release in this way. And they can have downsides, so think carefully about whether they are the right choices for you.
You might also consider gifting your property to a relative or friend while you’re still alive. But if you continue living in your home rent-free, known as a gift with reservation, the property is still treated as being in your estate for IHT purposes. To avoid this, you would need to pay rent at the market rate to the beneficiary. This can be complex, so it’s best to seek professional financial advice.
Trusts can help you pass on wealth while keeping some control over how it’s used. Discretionary trusts, bare trusts and discounted gift trusts are some of the trusts available.
For example, you might want to consider a discretionary trust to support a younger relative but ensure they don’t receive a lump sum too early.
Godley says: “By putting it in trust for them, you become a trustee and retain some control, as you can dictate what they can take out of the trust and when.”
However, as with any gift, assets placed in a trust remain part of your estate for IHT purposes unless you survive for seven years after making the transfer. Some types of trust also attract upfront or ongoing charges, so professional advice is essential.
Some people use a life insurance policy written in trust in order to pay the IHT bill. This approach can have downsides, so also needs careful consideration and professional advice.
Charitable donations can be one of the most effective ways to reduce your IHT bill, while also supporting causes you care about.
Charity donations are immediately exempt from IHT, but they can also reduce the amount of IHT paid on the rest of the estate.
Mark Greer, managing director of the Charities Aid Foundation, explains: “If 10% or more of the estate is gifted to charity, then the rate of inheritance tax paid on the rest of the estate is reduced from 40% to 36%. For instance, a £100,000 gift to charity from a £1 million estate only ‘costs’ the beneficiaries £24,000.”
IHT planning is complex, and the rules can change. A financial adviser or solicitor can help you structure your estate efficiently and ensure your will reflects your wishes.
We partner with Co-op Legal Services to offer advice and services for you and your family.
Discover how to assess how much you can safely afford to spend or give away.
Explore the essentials of UK inheritance tax, including nil rate bands, gifting rules & other exemptions.
Discover expert tips on lesser-known ways to save, from gifting income to using trusts and insurance.
Find out the pros and cons of downsizing to cut your IHT bill.
Learn how setting up a trust can help you pass wealth to grandchildren, maintain control, and potentially save IHT.
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