When it comes to passing on wealth, one of the biggest concerns for families is how much might be lost to Inheritance Tax (IHT). It’s a common worry — and a valid one. But with careful, early planning, it’s possible to significantly reduce the amount your estate may owe.
At Flying Colours Advice, we believe the best results come from early, informed decisions. Whether you’re thinking about your home, your investments or your business interests, there are practical steps you can take to protect more of what you’ve built for future generations.
Here are six smart, effective ways to reduce your IHT liability, with examples to highlight how these strategies work in practice. Please bear in mind that the effectiveness of these or any tax advantages we discuss depend on individual circumstances.
1. Make Full Use of Your Nil-rate Bands
Everyone has a tax-free allowance, known as the nil-rate band, currently set at £325,000. If you’re passing on a main residence to your children or grandchildren, you may also benefit from the residence nil-rate band of £175,000.
For married couples and civil partners, unused allowances can be transferred—allowing you to pass on up to £1 million free from Inheritance Tax.
Example: Sophie and James are married and own a house worth £600,000, plus savings of £300,000. By using their combined allowances, they can leave their full estate to their children without triggering any IHT.
Why it matters: IHT is applied only to the value of your estate above specific thresholds. These allowances can vary depending on your circumstances, including whether you’re married, widowed, or passing on a family home. If you don’t fully understand or use all available bands, you could be missing out on valuable tax savings that your estate is entitled to claim.
Please note that a taper reduces the amount of the residence nil-rate band by £1 for every £2 that the net value of the estate is more than £2 million.
2. Give Within Your Allowances
Gifting is a powerful way to gradually reduce your estate’s value, but it must be done within the rules to avoid unexpected tax charges.
Each tax year, you can give away up to £3,000 without it counting towards your estate. You can also give small gifts under £250 per person and make wedding gifts within set limits. In addition, regular gifts from surplus income (like helping family members with living costs) can be exempt if structured correctly.
Example: Margaret gives each of her three grandchildren £1,000 a year towards university costs. Because these payments come from her surplus income and are regular and affordable, they are completely exempt from IHT.
Why it matters: While giving during your lifetime can be effective, it’s important to stay within HMRC’s rules to ensure those gifts aren’t later pulled back into your taxable estate. Structured correctly, gifting can significantly reduce the IHT your family may face, but misunderstanding the exemptions or making informal transfers without records could lead to unintended tax consequences later on.
3. Consider Using Trusts
Trusts can be a smart way to manage how wealth is passed on, especially if you want to maintain some control over how and when assets are accessed. They can also help remove assets from your estate, reducing your IHT liability.
However, the establishment of Trusts can be complex area and must be set up carefully to avoid unintended tax consequences, as different types of Trusts carry different rules.
Example: Paul places £100,000 into a discretionary Trust to support his grandchildren’s future home deposits. The funds are managed separately from his estate, helping to reduce potential IHT, while ensuring the money is used for the right purpose.
Why it matters: Trusts can provide a secure way to manage wealth across generations, but they are subject to their own legal and tax frameworks. If used appropriately, they can help safeguard family wealth, provide for vulnerable beneficiaries or stagger inheritance over time. However, they require careful setup and ongoing management to remain tax-efficient and legally compliant. Additionally, incorporating trusts into an estate plan often necessitates understanding inheritance tax strategies to ensure optimal financial outcomes. This knowledge can help families mitigate tax liabilities and preserve more wealth for future generations. Ultimately, a well-structured trust not only protects assets but also aligns with long-term financial goals. It is essential to weigh the pros and cons of trusts when considering them as part of an estate planning strategy. While they offer substantial benefits in terms of asset protection and tax efficiency, there may be complexities and costs involved in establishing and maintaining them. Families should consult with legal and financial advisors to navigate these intricacies and make informed decisions that align with their specific needs and goals.
4. Use Charitable Giving to Your Advantage
Supporting charities you care about can also help lower your IHT bill. Gifts to registered charities are 100% exempt from IHT, and if you leave 10% or more of your estate to charity, the tax rate on the rest of your estate may drop from 40% to 36%.
Example: Anita leaves 10% of her £900,000 estate to a cancer charity. As a result, the tax rate on the remainder of her estate falls to 36%, reducing the total tax bill and making a bigger difference to her chosen cause.
Why it matters: Leaving part of your estate to charity can reduce your overall IHT bill in two ways by:
- removing the charitable gift from your taxable estate; and
- potentially qualifying you for a lower tax rate on the rest.
It’s a rare example where you can support a meaningful cause while simultaneously improving the financial outcome for your heirs.
5. Set Up Life Insurance in Trust
While a life insurance policy won’t directly reduce the size of your estate, it can cover the IHT bill and protect your family’s inheritance.
When written in Trust, the payout stays outside your taxable estate and can be accessed quickly, providing funds to settle any IHT due without the need to sell assets or take out a loan. Since IHT is usually due within six months of death (and must be settled within two years), this gives your family peace of mind at an already stressful time.
When written in Trust, a life insurance payout stays outside your taxable estate and can be accessed quickly, providing funds to settle any tax due without needing to sell family assets.
Example: Helen’s estate is expected to face a £200,000 IHT bill. She arranges a life insurance policy for that amount, placing it in Trust. When she passes away, her children receive the policy payout tax-free and use it to pay the IHT, preserving the rest of the estate without needing to sell the family home or investments. This proactive approach not only safeguards the family’s assets but also allows them to focus on grieving rather than financial burdens. Additionally, for those looking to understand how life insurance can impact their estate planning, resources on inheritance tax overpayments explained can provide valuable insights into potential savings and strategies. By utilizing these tools effectively, families can better navigate the complexities of inheritance tax and ensure their loved ones are taken care of.
Why it matters: When estate assets are tied up in property or investments, life insurance can provide a quick and tax-efficient source of funds for covering IHT. Writing the policy in Trust ensures the payout goes directly to your chosen recipients, bypasses probate and isn’t taxed as part of your estate. It helps avoid rushed sales or borrowing and brings reassurance that the bill can be dealt with smoothly.
6. Explore Reliefs for Complex Estates
If you own a business, farmland, or certain types of shares, you may qualify for Business Relief or Agricultural Relief. These can offer up to 100% exemption from IHT on eligible assets, dramatically reducing the tax burden on your estate.
However, these reliefs come with strict conditions — and staying compliant over time is essential.
Example: Dan owns a small manufacturing company. Because the business qualifies for 100% Business Relief, he passes it on to his daughter without incurring IHT, preserving both the business and its future value for the family.
Why it matters: Specialist reliefs are designed to support business owners and agricultural families, but they’re not automatically applied. You need to plan ahead to ensure assets qualify and are structured appropriately, particularly if you’re thinking about selling, transferring, or passing them on. Getting this right can preserve significant value and help you maintain continuity across generations.
Upcoming changes to be aware of:
The government has announced that, from 6 April 2026, agricultural property relief and business property relief will be reformed. While the 100% rate of relief will continue for the first £1 million of combined agricultural and business property (helping to protect family farms and businesses) any value above that threshold will receive relief at a reduced 50% rate.
In addition, the rate of business property relief will be reduced from 100% to 50% for all shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
These changes may have a significant impact on estate planning decisions, particularly for those with larger holdings or unlisted business shares. It’s essential to review your plans ahead of time to ensure you stay on track and make the most of the available reliefs before the new rules take effect.
Start Planning Today
The best inheritance tax strategies are built over time, not rushed at the last minute. The earlier you start thinking about your estate plan, the more options you’ll have to protect your family’s future and minimise your tax exposure. By proactively addressing your estate plan, you can effectively mitigate the inheritance tax impact on families, ensuring that your loved ones receive the maximum benefit from your assets. This foresight not only provides financial security but also alleviates potential disputes among heirs, paving the way for a smoother transition of wealth. Regularly reviewing and updating your plan in response to changes in laws or personal circumstances further enhances its effectiveness. Additionally, understanding the inheritance tax budget implications of your decisions is crucial for long-term financial planning. By anticipating potential liabilities, you can structure your estate in a way that aligns with your financial goals and protects your beneficiaries. Involving financial advisors early in the process can also provide valuable insights and strategies tailored to your unique situation. In this context, it’s important to ensure that barry’s inheritance tax arrangements are thoroughly evaluated, as they can significantly influence the overall estate strategy. By integrating tailored solutions that reflect Barry’s specific financial landscape, these arrangements can optimize tax efficiency and enhance the legacy left to beneficiaries. A comprehensive approach, coupled with expert guidance, will ultimately secure a more advantageous outcome for Barry’s family.
At Flying Colours, we help individuals and families create personalised plans that make full use of allowances, exemptions, and reliefs, helping you pass on wealth with confidence and peace of mind.
If you’re unsure where you currently stand, use our quick IHT Calculator to get an initial indication of your potential IHT liability.
Want to Know More?
We’re hosting a free Inheritance Tax webinar this June, where our experts will cover key strategies in more detail, highlight common mistakes to avoid, and answer your questions live.
Book your place now or speak to a Flying Colours adviser today to start building your estate plan with expert support.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or Will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.