There could be many people you’re hoping to leave your wealth to after you die. Your spouse, your child, your neighbour’s cat…
But HMRC is unlikely to be on your list of chosen beneficiaries.
And yet, without careful estate planning, you could unintentionally make HMRC a key beneficiary on your death. If you’re splitting your wealth between multiple loved ones, HMRC might even end up getting the largest slice of the pie.
You’ve worked hard to build your wealth. Naturally, you want as much of it as possible to end up in the pockets of loved ones (once it has provided you with enough to live comfortably and enjoy yourself, of course).
Thankfully, there are a few ways you can help make sure that happens. Here are five ways you could use comprehensive estate planning to mitigate your estate’s Inheritance Tax (IHT) bill.
1. Gift early to reduce the size of your taxable estate
“Giving while living” is a common strategy to simultaneously support loved ones and reduce your estate’s IHT liability.
But it’s important to understand the rules and limitations before handing over your life savings.
Each year, you have a few allowances that enable you to gift cash or assets and immediately release their value from the IHT net. In 2025/26, these exemptions are:
- Annual exemption: Up to £3,000, which you can gift to a single recipient or spread across multiple people.
- Wedding gift allowance: £5,000, £2,500, or £1,000 to someone getting married or entering a civil partnership, depending on your relationship to them.
- Small gift allowance: An unlimited number of gifts of up to £250 per person.
- Normal expenditure out of income: Regular gifts made from your income, subject to strict conditions.
Non-exempt gifts may be subject to Inheritance Tax when you pass away
If you make gifts beyond these exemptions, they may be treated as potentially exempt transfers (PETs).
This means that, should you die within seven years of making the gift, its value may be included in your estate when calculating IHT. So, no, you can’t simply hand over a wad of cash from your deathbed and expect to avoid an IHT bill!
In some cases, IHT may be charged at a tapered rate if you die within seven years of giving a gift.
So, if you want to gift a large sum, it could be worth doing so sooner rather than later to minimise the risk of it being subject to IHT.
2. Share nil-rate bands with your partner to maximise your tax-free estate
If you have a partner, you probably share an awful lot with them already. A bottle of wine, bank accounts, a knowing look or two…
But did you know you can share your nil-rate bands, too?
Generally, you will each have a nil-rate band of £325,000, as of 2025/26. This is the value of your estate up to which no IHT is payable. If you leave your home to your child or grandchild, you might also benefit from the residence nil-rate band of up to £175,000, bringing your tax-free total up to £500,000.
You and your spouse each have separate nil-rate bands. However, when one of you dies, any unused allowance can generally be transferred to the surviving partner, provided you’re married or in a civil partnership.
So, if you qualify for the full residence nil-rate band, £1 million of your combined estate could be out of HMRC’s reach.
3. Use trusts to shield assets from Inheritance Tax
Trusts are often misunderstood. Perhaps they bring to mind the “trust fund baby” stereotype, or maybe you just deem them too complicated to be worth the headache.
And to be honest, it’s not hard to see why. Trusts are complex legal arrangements, with seemingly endless types to choose from, each with its own detailed set of rules (which can sometimes put people off).
But when used effectively, trusts can be a powerful tool for mitigating your estate’s IHT liability. At a basic level, there are three main categories:
- Bare trusts: Assets in a bare or absolute trust are held in the name of the trustee but immediately belong to the beneficiary. IHT is usually applied in the same way as a non-trust gift – i.e. no IHT is charged if you die seven years or more after transferring assets into a trust.
- Discretionary trusts: Funds in a discretionary trust are also typically managed by the trustee, who can make certain decisions about how assets are distributed to beneficiaries, as long as they align with the trust deed. They are often treated as Chargeable Lifetime Transfers (CLTs), meaning IHT may be due at a reduced rate on transfer, at each 10-year anniversary, and when the funds are withdrawn.
- Interest in possession trusts: These trusts can be used to leave certain assets (such as investments) to one or more beneficiaries, while a different beneficiary is entitled to the income they generate (such as returns). IHT is applied in a similar way to discretionary trusts.
The most suitable trust for you will depend on your unique circumstances and needs. If you’d like to know more about using trusts to keep more of your wealth out of HMRC’s hands, be sure to ask at your next annual review – or give us a call today if you’re keen to get started.
4. Leave a charitable legacy to potentially reduce your estate’s Inheritance Tax rate
Where IHT is payable, it is usually charged at a rate of 40%. But you may be able to reduce your IHT rate by leaving a charitable legacy in your will.
If you leave 10% or more of your net estate to one or more charities, your estate’s IHT rate may drop to 36%.
What’s more, the donation itself will be deducted from your gross estate, reducing the value subject to IHT.
This can be an effective strategy to simultaneously support a good cause and reduce the amount of your wealth that ends up with HMRC. But it’s worth noting that this generally means you have less wealth to give to loved ones.
5. Claim Agricultural or Business Relief if you’re eligible
I don’t think the public has ever heard quite so much about Agricultural and Business Relief as they have over the past couple of years.
In essence, the relief currently allows business owners to claim 100% IHT relief on all qualifying business assets. But from April 2026, this is set to be limited to just £2.5 million in assets – or a combined total of £5 million if you share allowances with a spouse.
Assets exceeding the £2.5 million cap will benefit from relief at 50%. So, it’s worthwhile for your beneficiaries to claim relief on all qualifying agricultural and business assets when you pass away to help mitigate your estate’s IHT liability.
Get in touch
HMRC’s IHT regime is shifting constantly – and your own needs and circumstances are likely changing, too. As such, the most effective strategies for mitigating your estate’s IHT bill are also evolving.
If you’d like to review your estate plan ahead of our next annual catch-up, or if you’re looking to start getting support from Four Seasons for the first time, get in touch.
Email help@fourseasonsfp.co.uk or call us on +44 (0) 13 7240 4417.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
