‘I’m an inheritance tax expert – these are three effective ways to reduce your bill’

Britons are being urged to act now to protect their finances before stricter (IHT) rules take effect.

Currently, estates valued over £325,000 are taxed at 40%, a threshold known as the “nil-rate” band, which has remained unchanged since 2009. Chancellor has confirmed that these thresholds will stay frozen until 2030.

However, significant changes are coming in April 2026. Agricultural and Business Property Relief, which previously offered a full exemption for certain assets, will now only cover the first £1million, with any amount above this taxed at a reduced relief rate of 50%, effectively imposing a 20% tax.

In addition, AIM shares, which were previously fully exempt from IHT, will be taxed at 20% if held for at least two years.

Looking further ahead, from April 2027, inherited pensions may face both income and inheritance tax, potentially resulting in a combined tax rate of up to 67%, subject to ongoing consultation.

Ian Dyall, head of estate planning at wealth management firm , said: “Estate planning is about a lot more than just inheritance tax. It’s a peace-of-mind strategy to help families pass on wealth in the best way, one that meets as many of their needs and objectives as possible.”

He urged households to review their estate planning sooner rather than later. He said: “There’s an important opportunity for many households to look at their estate planning – not just through a tax lens but also thinking about what they want to do with their assets and what will end up being best for the family’s future.”

Make or check your Will

Creating or updating a Will is a “huge step” in securing financial peace of mind, according to Mr Dyall. He recommended working with a solicitor and a financial planner to avoid unnecessary stress or disputes for estate administrators and beneficiaries, potentially saving on inheritance tax bills.

Wills are essential for unmarried couples, as intestacy rules can lead to unintended asset distribution. Mr Dyall added: “For families with businesses or farms, recent changes to business and agricultural property relief mean traditional mirror Wills for married couples may no longer be the best strategy.”

The £1million Business Relief band isn’t transferable to a surviving spouse, which could waste tax benefits. Redirecting assets to children or a trust may result in “significant” tax savings.

It is also important to regularly review existing Wills to reflect current wishes and new tax rules, as is considering a lasting power of attorney (LPA) for those who want to ensure trusted individuals can act on their behalf if needed.

Gift or spend

With rising IHT liabilities, Mr Dyall advised people to reconsider their wealth management strategy, especially as become taxable and asset values rise.

He highlighted that the residence nil-rate band could erode if an estate exceeds £ 2 million, adding, “One perennial remedy for this is to spend more on yourself and your family or to give away more wealth during lifetime to shrink the estate so that less of it is taxable at death.”

Currently, people can give cash or belongings of any value, but for the gift to be exempt from inheritance tax, the recipient must survive for seven years after receiving it.

Everyone can gift up to £3,000 per tax year without triggering the seven-year rule. Married couples or civil partners can gift up to £6,000 between them, or even £12,000 if they haven’t used their £3,000 allowance in the previous year.

In addition, small gifts of up to £250 and gifts out of excess income can be made to anyone free of inheritance tax.

People can also make gifts of between £1,000 and £5,000 (depending on the relationship to the giftee) for marriage or civil partnerships.

Additionally, people can gift “excess income” beyond the £3,000 limit, as long as these gifts are regular, they intend to keep making them, and they can show the money isn’t needed to maintain their lifestyle. These gifts have no set limit, as it depends on the person’s income and personal needs.

While gifting wealth is a common strategy, the rules are complex. Mr Dyall cautioned against impulsive decisions and recommended a longer-term gifting plan with professional guidance.

Rethink your pension

With changes to IHT rules, retirees may need to rethink how they manage pension pots to avoid creating or worsening tax liabilities. Mr Dyall warned that pensions could be “double-taxed” if the holder dies at 75 or older, with beneficiaries facing income tax on withdrawals already subject to IHT at 40%.

This could result in an effective tax rate of 67% for higher-rate taxpayers.

To mitigate this, retirees might consider drawing down pensions more quickly around age 75 or accelerating withdrawals of the 25% tax-free lump sum for spending or gifting, starting the seven-year clock for tax exemption.

Mr Dyall added that gifting from regular pension withdrawals could be a strategy. Still, he cautioned: “If you are trying to use the excess income exemption, what you can’t do is take all your tax-free cash, stick it in a bank account and gift it gradually from there, as then it will be seen as a gift from capital and not from income.”