Reducing inheritance tax: Three smart strategies you may not have considered

According to the most recent government figures, inheritance tax (IHT) receipts climbed to a record high of £8.5 billion in the 2025/26 tax year.

This is largely due to the ongoing freeze on IHT thresholds, rising asset values and property price increases.

Recent changes to reliefs (such as business and agricultural property reliefs) may see further increases to IHT receipts. Moreover, from April 2027, most unused pension funds will no longer be exempt from IHT. This could nudge the value of your estate beyond – or further beyond – the thresholds, increasing your liability.

As such, if you want to ensure your loved ones receive as much of your estate as possible, careful planning is crucial.

Read on to learn about three less well-known ways you and your beneficiaries could reduce a potential IHT bill.

1. Gifting from surplus income

Lifetime gifting allows you to give away some of your wealth each year without triggering an IHT charge. This includes the £3,000 annual exemption and various other allowances, such as the £250 small gift allowance and gifts for a wedding or civil partnership.

However, a recent survey by Canada Life reveals that 72% of UK adults are unaware of the ‘normal expenditure out of income’ rule. And yet, this could potentially allow you to pass on a significant amount of money free from IHT, provided you meet the following criteria:

• Gifts must come from your net income, not from savings or other capital
• There must be a proven pattern of regular gifts, rather than a one-off payment
• You must be able to maintain your current standard of living while giving the gifts

Make sure you keep accurate records of any regular gifts you make, as the executors of your will must submit a claim to use this exemption.

2. Loan trusts

If you’re wary of giving money away outright, a loan trust could be an alternative worth considering.

Instead of making a gift, you lend a lump sum to a trust as an interest-free loan that’s repayable on demand, in full or in part. As such, you retain access to your original capital, which may prove useful if your circumstances change.

The trustees invest the money on behalf of your beneficiaries (often in a bond).

For IHT purposes, the outstanding loan stays within your estate. However, any growth beyond this immediately falls outside your estate.

In effect, you ‘freeze’ the value of this part of your estate for IHT, preventing future growth from increasing your liability, while still being able to call back the loan if you need to.

You can also waive or gift your right to the loan if you no longer need access to these funds, or leave them to your chosen beneficiary in your will.

When you pass away, the unpaid original loan value counts as part of your estate for IHT purposes, while any investment growth goes directly to your trust beneficiaries.

3. Downsizing relief

As part of the planning process, we regularly review how your needs and goals evolve and what this could mean for your long-term financial plan.

For many clients, downsizing becomes a natural discussion point once children fly the nest, lifestyle preferences change or when planning for later-life care costs.

Cashflow modelling allows us to explore the potential financial impact of different scenarios, such as staying in your current home, downsizing now or downsizing later.
For some clients, moving somewhere smaller offers a useful way to:

• Release equity to boost retirement income or fund care
• Reduce ongoing maintenance and running costs
• Free up capital to support loved ones

This is when the downsizing relief (also known as the downsizing addition) could become a useful financial planning tool. It protects you from losing a valuable IHT allowance – the residence nil-rate band – if you move to a less valuable property.

The residence nil-rate band allows you to pass on up to £175,000 (2026/27) IHT-free if you leave your main home to a child or grandchild. This is available in addition to the standard nil-rate band of £325,000 (2026/27).

For the residence nil-rate band to apply, you normally need to pass a qualifying home to a direct descendant on your death. If you sold, downsized or otherwise gave up your home, you could lose this valuable extra allowance unless the downsizing addition applies.

According to the government website, your estate could claim this relief if:

• You gave away or downsized to a less valuable home on or after 8 July 2015
• Your former home would have qualified for the residence nil-rate band if you’d kept it until you died
• Your direct descendants will inherit at least some of your estate

Including inheritance tax planning as part of your broader financial strategy

Inheritance tax planning works best as part of a broader, long-term financial plan.

Your financial planner can use sophisticated cashflow modelling software to show how different planning options might affect your income, capital and IHT exposure over time.

For example, we can model different gifting scenarios to help you understand how giving away some of your wealth during your lifetime might impact your retirement lifestyle.

We also work closely with our dedicated trusts and estate team to provide a joined-up approach to financial planning. Together, we can support you in creating an estate plan that reflects your wishes and is as tax-efficient as possible. When the time comes, we’ll also be there to support your executors and beneficiaries, should they need it.

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, cashflow planning, or tax planning.