Six Practical Steps to Reduce Your Inheritance Tax Liability

Imagine inheriting the family home - the place you grew up in, the place filled with memories - only to discover you can’t afford to keep it.

This is the reality for many families affected by the UK’s 40% Inheritance Tax(IHT).

When someone dies, their estate must pay the tax before you receive anything. And if the estate doesn’t have enough cash to cover the bill, the responsibility falls onto you. That often means:

1. borrowing money,

2. taking out a mortgage,

3. or even selling the house you’re meant to inherit.

It’s a stressful situation that catches people off guard, that’s why the smartest and most effective strategy is to reduce the tax before death, through proper planning.

With the right legal steps, many families can cut their inheritance tax bill dramatically - and in some cases eliminate it entirely - ensuring that loved ones don’t face a financial burden at an already emotional time.

What is Inheritance Tax (IHT)?

Inheritance Tax is a tax on the estate of someone who has died. The estate includes everything they owned - their home, money, savings, investments, and any personal belongings of value. Before anything can be passed on to children, grandchildren or other beneficiaries, the estate may have to settle an Inheritance Tax bill with HMRC.

Right now in the UK, the standard rate of Inheritance Tax is 40%, and it applies to the value of the estate above certain tax-free allowances.

To put it simply:

The government takes a portion of what someone leaves behind before you receive it.

The idea of losing a large portion of your estate to tax can be worrying, especially when your priority is to look after your family. The important thing to remember is that Inheritance Tax isn’t fixed - you can take meaningful steps to minimise it.

Below, our Private Client team outlines six practical steps you can take to reduce your inheritance tax liability.

1. Make your Will early

Many people put off making a Will, but it’s one of the most effective steps you can take to reduce Inheritance Tax. A properly drafted Will gives you control over who receives what and allows you to plan ahead using the tax rules available.

For example, anything you leave to your spouse or civil partner is completely exempt from Inheritance Tax. You may also be able to use the Residence Nil Rate Band (RNRB), which gives you an additional tax-free allowance if you leave your home - or your share of it - to your children or grandchildren.

In short, a Will ensures your estate is structured in the most tax-efficient way and helps you take advantage of reliefs you might otherwise miss.

2. Make use of Reliefs and Exemptions

Goverment offers a range of reliefs and exemptions that can significantly reduce your tax bill. These include:

• Gifts to charity
• Regular gifts made out of surplus income
• Certain lifetime gifts
• Business or Agricultural Relief, depending on your assets

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Our Private Client team can review your estate and identify which reliefs apply to you. Because tax rules change regularly, getting up-to-date advice ensures your planning remains as efficient as possible.

3. Make Lifetime Gifts

Giving assets away during your lifetime can reduce the size of your estate - and therefore the amount of Inheritance Tax due. Most gifts to individuals become completely tax-free if you survive for seven years after making them.

Even if you pass away sooner, the tax on the gift usually reduces after the third year due to a sliding scale known as taper relief.

This is why early planning is so important: the sooner you start making plans, the more likely they are to fall outside your estate entirely.

4. Consider using Trusts

Trusts can be a powerful way to pass on assets while still keeping some control over how they are used. When structured correctly, assets placed into certain types of trusts may fall outside your taxable estate.

Trust law is complex, and some trusts can trigger additional tax charges, so it’s important to get specialist advice. Our team can guide you on the most suitable type of trust for your goals and your family’s needs.

5. Understand the impact of Moving Abroad

If you’re thinking about moving overseas, it’s important to understand how this affects your tax position. The rules on domicile changed in April 2025, the UK moved from a “domicile-based” system to a residence-based one. This means that simply leaving the UK, or being non-UK-domiciled, will no longer automatically take your worldwide estate out of UK Inheritance Tax.

Under the new rules:

1. You may be treated as a Long-Term UK Resident (LTR) for Inheritance Tax if you have lived in the UK for 10 out of the previous 20 tax years.

2. If you meet this test, your worldwide assets may fall within the UK Inheritance Tax net - not just your UK assets.

3. When you leave the UK, your worldwide assets can remain subject to UK Inheritance Tax for a period of between 3 and 10 years, depending on how long you lived here before. This is sometimes referred to as the “IHT tail”.

4. UK assets remain taxable regardless of where you live.

Because the April 2025 reforms are significant and interact with wider changes to trust planning and international tax rules, it’s essential to speak to a solicitor or tax adviser if you are thinking about moving abroad. Proper planning now will help you avoid unexpected tax exposure in the future.

6. Consider Life Insurance to cover future Tax

Life insurance has traditionally been a useful way to ensure funds are available to pay any Inheritance Tax due on your estate, helping your beneficiaries avoid selling assets or taking on debt.

However, with the 2027 reforms on the horizon, this area is becoming more complex. The government is reviewing how life insurance policies - even those written into trust - may be treated for Inheritance Tax purposes. In some cases, the policy itself may be counted within your estate, which means you may need a larger pay out to cover both

• the IHT on your estate, and
• the IHT on the insurance policy itself.

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Because these rules are changing, it’s vital to get up-to-date advice before relying on life insurance as part of your tax-planning strategy.

This area is also subject to upcoming changes, so it’s best to consult a solicitor or tax adviser and ensure your Will and estate plan are kept up to date.

Be Aware of the Pension Reforms Coming in April 2027

Pensions have historically been one of the most tax-efficient ways to pass on wealth. Under the current rules, many pension pots sit outside of your estate for Inheritance Tax purposes, meaning your beneficiaries can often receive them tax-free.

However, this is set to change.

From April 2027, proposed reforms mean that certain pensions may start to form part of your taxable estate. In other words, your pension pot - or part of it -could begin to attract Inheritance Tax in the same way your other assets do.

1. Most unused pension funds will become part of your taxable estate

Unused pension pots - including many lump sum death benefits - will be treated like other inherited assets.

This means they may now:

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• form part of your estate for Inheritance Tax, and

• face a 40% tax charge on anything above the available allowances.
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For many families, this could significantly increase their overall IHT exposure.

2. Executors will be responsible for reporting and paying the tax

Instead of pension providers handling the tax, your personal representatives (executors) will need to report pension values and pay any IHT due. Pension scheme administrators can pay the tax directly to HMRC if asked, but the responsibility sits with the estate.

This makes accurate estate information even more important.

3. Death-in-service benefits will remain exempt

Death-in-service lump sums - typically a multiple of salary - will continue to be IHT-free, whether paid through a discretionary trust or a non-discretionary public sector scheme.

These benefits are recognised as financial protection, not tax planning tools.

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4. Dependants’ pensions will still be exempt

Pensions paid to surviving dependants will remain outside the scope of IHT, including:

1. dependants’ scheme pensions from defined benefit arrangements

2. payments to a spouse or civil partner

3. payments to registered charities

This ensures continuity for families relying on ongoing income.

Final Thoughts

Inheritance Tax has always been complex, but the upcoming changes - especially the pension reforms arriving in April 2027 - make careful planning more important than ever. Your Will, your pension nominations, and the way your assets are structured can all affect how much tax your loved ones may face.

Even if you already have a Will in place, it’s essential to keep it regularly updated. Tax rules evolve, your circumstances change, and what was tax-efficient five years ago may not be the best approach today. The new rules around pensions becoming part of your taxable estate are a clear example of why estate planning can’t be a one-off exercise.

By reviewing your arrangements now - and making sure your Will, trusts, pensions, and lifetime gifts all work together - you can protect more of your wealth for the people who matter most.

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If you would like tailored advice, or if you're unsure which strategies are right for your family, our Private Client team is here to help.

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To contact us, please fill out the enquiry form to speak to one of our experts.

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