Five ways to reduce inheritance tax on your estate

Inheritance tax is charged at 40% on the value of your estate above the nil-rate band thresholds. For many families, this is a substantial and avoidable bill. Most of the main ways to reduce it are well-established, legal, and accessible.

None of these approaches is guaranteed to produce a specific saving. The right combination depends on your circumstances, your age, your assets, and what matters most to your family. But knowing the options is the starting point.

1. Make gifts while you are alive

Any gift you make that you survive by seven years falls outside your estate for inheritance tax purposes. This is the most widely used and often most effective strategy, but it requires time.

There are also exemptions you can use immediately without waiting seven years. You can give away up to £3,000 per year as a tax-free annual exemption, and this can be carried forward one year if unused. Each tax year you can also give up to £250 to any number of people, provided you have not used the annual exemption for the same person.

Regular gifts from surplus income, provided they are genuinely out of income and not capital, can also be immediately outside your estate under the normal expenditure from income exemption. This one is underused and worth asking an adviser about if you have regular income you do not need to spend.

2. Use trusts for long-term protection

Placing assets in certain types of trust can remove them from your estate, though the rules are complex and the inheritance tax treatment depends on the type of trust and how long you live after the transfer.

Discretionary trusts are commonly used for IHT planning. They allow a group of beneficiaries to benefit at the trustees' discretion, rather than giving assets outright. This can be useful where you want to pass on wealth but retain some control over how and when it is distributed.

3. Review your pension before April 2027

Until April 2027, most defined contribution pensions sit outside your estate. This means a pension pot could be passed to your beneficiaries without inheritance tax. From April 2027, this is set to change, and unused pension funds are likely to be counted as part of your estate.

If you have a meaningful pension pot and were relying on this as part of your estate plan, revisiting your strategy before 2027 could make a significant difference.

4. Take out a life insurance policy written in trust

A life insurance policy can be used to cover the inheritance tax bill your estate will face, rather than eliminating it. If the policy is written in trust, the payout goes directly to your beneficiaries and does not itself form part of your estate, so it does not attract further inheritance tax.

This does not reduce the tax owed. It means your family has the cash to pay the bill without needing to sell assets, including the family home, under time pressure.

5. Give to charity

Gifts to registered UK charities in your will are exempt from inheritance tax. Beyond that, if you leave at least 10% of your net estate to charity, the inheritance tax rate on the rest of your estate may reduce from 40% to 36%.

For larger estates, this could mean that a charitable gift costs you less than it appears at face value, because it both generates a direct exemption and lowers the overall rate.

A note on planning ahead

Several of these approaches require years to take full effect, particularly gifting and trusts. The earlier you begin planning, the more options are available. Leaving it until your late seventies or a health diagnosis significantly narrows what is possible.

• Gifting requires the seven-year clock to run from the date of the gift
• Trust transfers may involve an upfront inheritance tax charge if they exceed the nil-rate band
• Life insurance premiums depend on age and health at the time you apply
• Pension restructuring before 2027 takes time to review and implement properly

Devonshire Wealth connects families with estate planning and IHT specialists across the UK. Visit our inheritance tax planning page to find a qualified adviser who can assess which approaches suit your estate.