Avoiding Inheritance Tax: your guide to planning your estate

Inheritance tax (IHT) is one of those subjects I see many families push to the back of their minds, until it suddenly becomes unavoidable.

The reality is that with house prices rising, tax-free allowances frozen, and new rule changes on the horizon, more families than ever will be affected.

Acting early isn’t just about protecting wealth; it’s a selfless step that puts your loved ones first, sparing them unnecessary stress and cost in the future.

Every family’s situation is unique, so it’s always important to seek professional advice before making any big decisions. That said, understanding the basics of inheritance tax can help you plan ahead and avoid being caught out.

Over the years, I’ve spoken with many clients who assumed IHT was just for the wealthy, only to discover that the value of their home alone pushed them over the tax threshold. The good news is there are straightforward steps you can take to reduce your liability for IHT.

This guide summarises many of the initial conversations I have with clients and their families. I hope that a quick walk-through of some of the high-level strategies will help you avoid paying more inheritance tax in the UK than you have to.

Why inheritance tax is becoming a bigger issue in the UK

Inheritance tax used to be something only very wealthy families worried about, but that’s no longer the case.

House prices have increased dramatically and inheritance tax allowances haven’t kept up. That is leaving more people finding out that their family faces a large tax bill when they pass wealth on.

In some parts of the country, especially London and the South East, house prices have soared. Over 700,000 homes across Great Britain are worth more than £1 million.

But it’s not just million-pound homes that are affected. The average UK house price is around £300,000 today, which means many ordinary family homes are close to or over the inheritance tax threshold.

The rules on how much you can pass on tax-free haven’t moved for years.

Right now, you can leave £325,000 tax-free (this is called the nil-rate band) and an extra £175,000 if you’re passing your home to children or grandchildren (this is the residence nil-rate band). That makes a combined total of £500,000.

The problem is these limits haven’t risen in years, even though the value of houses and savings has. If they had risen with inflation, families would have much more breathing room.

That’s why more families are now finding themselves caught by inheritance tax, often without realising it. As a result, I’m seeing more people take action early to protect their loved ones from an unnecessary tax burden in the future.

Using allowances to reduce your inheritance tax bill

One of the simplest ways we reduce inheritance tax is by making full use of allowances.

These thresholds can make a significant difference, but many people don’t realise just how much protection they provide when combined.

Here is a quick summary of the key allowances to be aware of:

For couples, these allowances can be combined, effectively doubling the protection. That means, with the right planning, you could pass on up to £1 million tax-free to your children or grandchildren. I often see families’ relief when they realise how effective these combined allowances can be.

Making lifetime gifts

Lifetime gifting is a popular way to reduce inheritance tax. The concept is straightforward: the more you give away during your lifetime, the smaller your taxable estate will be when you pass away.

There are a few ways to approach this:

• Regular gifts from income: If your income exceeds your spending, you can give away the surplus each year. This doesn’t count towards your £3,000 annual gift allowance.
• One-off gifts: Larger gifts can be made, and if you survive for seven years after making them, they usually fall outside of IHT. If you pass away earlier than seven years after making the gift, tax is charged on a sliding scale – please see below for how the rates work.
• Charitable gifts: Donations to charities are generally exempt from IHT. In fact, leaving 10% or more of your estate to charity can reduce the IHT rate on the rest from 40% to 36%.

The benefit here isn’t just tax efficiency, it’s also about seeing your loved ones enjoy the gift while you’re still around. I’ve seen clients experience real joy helping their children buy a first home or supporting grandchildren through university.

Making use of trusts

Trusts often sound complicated, but they’re simply a legal way of holding and managing assets on behalf of others.

They can be an effective tool for inheritance tax planning because they allow you to pass on assets while keeping some control over how they’re used.

Some common types of trust include:

• Discretionary trusts – Trustees decide how and when beneficiaries receive funds.
• Life interest trusts – Income goes to one person (often a spouse) during their lifetime, with the capital eventually passing to others.
• Bare trusts – Beneficiaries are immediately entitled to the assets, often used for children.

Trusts can be useful if you want flexibility, protection from disputes, or reassurance that wealth is used responsibly. I’ve worked with families where trusts have been a lifeline, ensuring wealth is distributed fairly across generations.

Pensions and inheritance tax

Pensions have quietly been one of the best-kept secrets in inheritance tax planning. For now, most pension pots are outside your estate, which means they usually don’t trigger inheritance tax. That means:

• Your pension can often go straight to your beneficiaries without any inheritance tax.
• If you die before age 75, they typically pay nothing at all. If you die after 75, they might pay income tax on withdrawals, but there’s still no inheritance tax.
• Contributions you make to your pension today still reduce your taxable estate, and you get tax relief too.

But the bad news is that these rules are changing. Starting on 6 April 2027, unused pension funds will be counted as part of your estate for inheritance tax purposes. That means for the first time, your pension could be subject to inheritance tax, even if you die before drawing from it.

The government has confirmed that death-in-service benefits (like the pay-out from your employer’s scheme if you die while working) will remain exempt from IHT.

Another big change is who handles the paperwork and tax when someone dies. Originally, pension providers would have had to report and pay the inheritance tax. But now it’s going to be the personal representatives, the executors or family members managing your estate who are responsible.

What this means in real terms is that more estates, especially those with significant pension pots, will face inheritance tax, and families may have to deal with a lot more paperwork during a stressful time. That’s why I’m seeing a lot of people choosing to get ahead of this now.

Life insurance as a safety net

Even with good planning, inheritance tax can still be a factor. That’s where life insurance comes in.

A policy written in trust can provide a lump sum to cover any IHT liability, ensuring your beneficiaries don’t need to sell property or other assets quickly to pay the tax bill.

For many, this can bring peace of mind, knowing their loved ones won’t face unnecessary financial stress.

Upcoming changes to inheritance tax

The rules around IHT are under review, and changes may affect:

• Nil-rate bands – thresholds may be adjusted.
• Gifting rules – the seven-year rule and exemptions could be revised.
• Pensions – how pension assets are treated on death may change.
• Reporting requirements – families may face more paperwork and tighter deadlines.

Many people are reviewing their plans now to take advantage of the current rules while they remain in place.

Key takeaways

• More families are being caught by inheritance tax due to rising property values and frozen tax-free allowances.
• Making the most of allowances is a simple but powerful way to reduce liability.
• Lifetime gifts not only save tax but also allow you to enjoy giving while alive.
• Trusts and pensions remain central to effective estate planning.
• Life insurance can act as a safety net for unexpected tax bills.
• Professional advice helps ensure your strategy fits your circumstances.

Final thoughts

Inheritance tax planning doesn’t need to be overwhelming. By taking time to understand the allowances, gifting rules, and opportunities available, you can make informed decisions that protect your estate and support your family’s future.

I’ve helped many clients and families put these steps into practice, and the common theme is always peace of mind, knowing that wealth is protected and passed on in line with their wishes. If you’re concerned about inheritance tax or want to explore your options further, now is the time to act.

Get in touch with us today to discuss your estate planning.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. Always seek professional advice before making financial decisions.