Tax planning · UK · 2025/26
How to legally reduce Inheritance Tax
Inheritance Tax (IHT) is charged at 40% on the part of an estate above the tax-free bands. The good news: UK law gives families several legitimate ways to pass on more and pay less. Here's how they work, in plain English, with a tool to show your potential saving.
📘This is education, not advice. Everything here uses exemptions and reliefs that exist in UK law. Planning your estate to use them is legal. Hiding assets, undervaluing an estate, or "giving away" something you still benefit from is tax evasion, which is illegal. Estate planning is personal and easy to get wrong — speak to a solicitor or qualified tax adviser before acting.
Enter the estate value, then switch on the steps that apply. The tool compares the tax with no planning to the tax once these reliefs are used.
Illustration only, using 2025/26 figures. The residence band tapers away above a £2m estate, and the charity test is simplified here. It doesn't replace advice. Open the full inheritance tax calculator →
The reliefs, explained simply
Each card tells you what it is, who can use it, and what to watch out for — with a link to the official HMRC guidance.
💍 The spouse exemption
Married / civil partners
Anything you leave to your husband, wife or civil partner is completely free of inheritance tax, however large. And when you die, your unused tax-free bands transfer to them — the foundation of the "£1 million for a couple" figure.
Who: legally married couples and civil partners.
Watch out: it doesn't apply to unmarried partners, no matter how long together. (Different limits apply if your spouse lives permanently abroad.)
Official guidance →
🏠 The two tax-free bands
Everyone
Each person has a £325,000 nil-rate band, plus a £175,000 residence nil-rate band when a home passes to children or grandchildren. Couples can combine all four — up to £1 million tax-free.
Who: everyone for the £325,000; the £175,000 needs a home left to direct descendants.
Watch out: the residence band shrinks by £1 for every £2 your estate is over £2 million, disappearing entirely on larger estates.
Official guidance →
🎁 Gifts & the 7-year rule
Everyone
You can give money or assets away during your life. If you live for 7 years after the gift, it leaves your estate completely. Die within 7 years and it may be taxed — but taper relief reduces the rate on gifts made 3–7 years before death.
Who: anyone making genuine outright gifts.
Watch out: a "gift with reservation" — like giving away your house but still living in it rent-free — doesn't count and stays in your estate.
Official guidance →
📨 The yearly gift allowances
Everyone
Some gifts are tax-free immediately: £3,000 a year (the "annual exemption"), small gifts of £250 to anyone, wedding gifts, and — powerfully — regular gifts out of your surplus income that don't affect your standard of living.
Who: everyone; the income-gifts exemption suits those with more income than they spend.
Watch out: keep records, especially for gifts from income — your executors must show they were regular and affordable.
Official guidance →
❤️ Leave 10% to charity
Everyone
Gifts to charity are tax-free, and if you leave at least 10% of your net estate to charity, the inheritance tax rate on the rest drops from 40% to 36%.
Who: anyone leaving a qualifying charitable gift in their will.
Watch out: the 10% test is measured against a specific "baseline" figure — get the will drafted properly so it qualifies.
Official guidance →
🏢 Business & agricultural relief
Advanced
Qualifying business and farm assets can attract up to 100% relief, passing on largely free of inheritance tax. Trusts and life insurance written in trust are other planning tools families use.
Who: owners of qualifying trading businesses, farms, or some shares.
Watch out: rules are detailed and changing from April 2026 (relief is being capped). Pensions are also due to count towards estates from April 2027. Get specialist advice.
Official guidance →
Legal planning vs. illegal evasion
Estate planning is one of the most established, legitimate areas of tax — but the line is real.
✓ Legal planning
Making genuine gifts and surviving seven years; leaving money to your spouse or charity; using your yearly allowances; setting up a properly advised trust.
✗ Illegal evasion
"Giving away" your home but carrying on living there rent-free; hiding assets from HMRC; deliberately undervaluing the estate; backdating gifts.
Frequently asked questions
Is reducing inheritance tax legal?
Yes — using the spouse exemption, the nil-rate bands, gifting and charitable giving is legitimate estate planning. It's illegal only if you hide assets, undervalue the estate, or keep benefiting from something you claim to have given away.
How does the 7-year rule work?
Most gifts are "potentially exempt". Survive seven years and the gift leaves your estate entirely. Die within seven years and it may be taxed, with taper relief reducing the rate on gifts made three to seven years before death.
How can a couple pass on £1 million tax-free?
Unused bands transfer to the surviving spouse. Two £325,000 nil-rate bands plus two £175,000 residence bands total £1 million — as long as the home passes to direct descendants and the estate isn't large enough to taper the residence band.
Should I just give everything away now?
Not necessarily — you lose access to it, gifts within seven years can still be taxed, and giving away an asset you keep using doesn't work. This is exactly where personalised, regulated advice pays for itself.
Related
Educational guide — not tax, legal or financial advice. UK inheritance tax for 2025/26, explained in general terms. Reliefs have detailed conditions and are changing (business/agricultural relief from April 2026; pensions entering estates from April 2027). Estate planning depends entirely on your circumstances. Always confirm with
HMRC and a qualified solicitor or tax adviser before acting.