How to Reduce Inheritance Tax Legally: 9 Reliefs Ranked by Value

You cannot avoid inheritance tax by hiding money, but you can legally remove most estates from its reach using allowances Parliament wrote into the rules. Inheritance tax is charged at 40% on the value of an estate above the available nil-rate bands, so every £1,000 of relief you use is £400 that stays in the family rather than going to HMRC.

The nine reliefs below are ranked by the size of the tax saving they typically produce, not by how often they get talked about. Most of the value is concentrated in the first four.

• The nil-rate band is £325,000 and the residence nil-rate band is a further £175,000 — both transferable between spouses, which is where the familiar "£1 million for a couple" figure comes from.
• Anything left to a spouse or civil partner is exempt without limit, and it preserves their unused bands too.
• Gifts made more than seven years before death normally fall out of the estate entirely; gifts out of surplus income can be exempt immediately.
• Leaving 10% or more of the net estate to charity cuts the rate on the rest from 40% to 36%.
• Business and agricultural relief changed from April 2026: 100% relief on the first £1 million of qualifying assets, then 50% above that.

The nine reliefs, ranked by value

1. Leave it to a spouse or civil partner

Transfers between spouses and civil partners are exempt from inheritance tax with no upper limit, and the survivor also inherits the percentage of the nil-rate bands the first person did not use. That is the single largest relief in the system and it needs no planning beyond a valid will.

The practical effect is a combined allowance of up to £1 million: two nil-rate bands of £325,000 plus two residence nil-rate bands of £175,000.

Worked example

• First spouse dies leaving everything to the survivor — no tax, and 100% of both bands carry over.
• Survivor later dies with an estate of £1.2 million, including a home worth more than £350,000, left to the children.
• Allowances: £325,000 × 2 = £650,000, plus £175,000 × 2 = £350,000. Total £1,000,000.
• Taxable estate: £1,200,000 − £1,000,000 = £200,000.
• Tax at 40% = £80,000.

Without the transferred bands, the same estate would face tax on £700,000 — a bill of £280,000. The claim is not automatic: the executors have to make it, using the transfer of unused nil-rate band forms, within two years of the second death.

2. Business Relief and Agricultural Relief

Qualifying trading businesses, partnership interests, unquoted company shares and working farmland can attract relief at 100% or 50%. From 6 April 2026 the structure is a combined £1 million allowance at 100% for business and agricultural property, with anything above that getting relief at 50% — an effective 20% tax rate on the excess. Shares quoted on markets such as AIM attract 50% relief with no £1 million allowance.

Worked example

A qualifying trading business is valued at £2 million on death, with no other reliefs in play:

• First £1,000,000 — 100% relief, so £0 chargeable.
• Remaining £1,000,000 — 50% relief, so £500,000 chargeable.
• £500,000 × 40% = £200,000 of tax before the nil-rate band is applied, against £800,000 with no relief at all.

Ownership conditions matter: business and agricultural property generally has to be held for two years (longer in some agricultural cases), and assets held as investments rather than used in a trade are excluded. Run your own numbers with the Business Property Relief calculator.

3. The residence nil-rate band

On top of the £325,000 nil-rate band, there is a residence nil-rate band of £175,000 where a home (or the proceeds of one you have downsized from) passes to direct descendants — children, stepchildren, adopted or foster children, grandchildren and their spouses. It is worth £70,000 of tax per person.

Two catches drive most of the lost claims. First, the property has to go to descendants: leaving the house to a sibling, a niece or a discretionary trust can forfeit it. Second, the band is tapered by £1 for every £2 by which the estate exceeds £2 million, so a single person's residence band disappears at £2.35 million and a couple's transferred bands disappear at around £2.7 million. Reliefs like Business Relief do not reduce the estate for this taper test, which is why some business-owning estates lose it.

4. Give away surplus income

Regular gifts made out of income — not capital — are exempt immediately, with no seven-year wait and no monetary cap. The conditions are that the gifts form part of a normal pattern, come from income, and leave you able to maintain your usual standard of living.

Someone with a £70,000 pension income who spends £45,000 a year could give away £2,000 a month indefinitely and none of it would ever enter the estate. The relief lives or dies on record-keeping: executors have to set out income, expenditure and the gifts made, year by year, on the gifts schedule of the inheritance tax account. A simple annual note of income in, spending out and gifts made is what makes the claim survivable.

5. Outright gifts and the seven-year rule

A gift to an individual is a "potentially exempt transfer". Survive seven years and it drops out of the estate completely. Die within seven years and it is added back, using up the nil-rate band first.

Taper relief is widely misunderstood. It reduces the tax on the gift, not the value of the gift, and it only bites once the gift has used up the nil-rate band:

Worked example

• A £500,000 cash gift is made, with no earlier gifts in the previous seven years.
• Death occurs five and a half years later.
• The nil-rate band of £325,000 is set against the gift first, leaving £175,000 chargeable.
• Tax before taper: £175,000 × 40% = £70,000.
• Taper at 60% (5–6 years): £70,000 × 40% = £28,000.

Note that the whole nil-rate band has been consumed by the gift, so the rest of the estate is taxed from £0. Gifting also has a capital gains angle: giving away shares or a second property is a disposal at market value for CGT, taxed at 18% or 24% on residential property and most other assets above the £3,000 annual exempt amount.

6. Charitable legacies and the 36% rate

Gifts to UK charities are exempt from inheritance tax. Better still, if you leave at least 10% of the net estate (broadly, the estate after deducting debts, exemptions, reliefs and the available nil-rate band) to charity, the rate on the remaining taxable estate falls from 40% to 36%.

Worked example

An estate of £825,000 with a single £325,000 nil-rate band, so a baseline net estate of £500,000:

• No charitable gift: £500,000 × 40% = £200,000 tax. Family receives £625,000.
• 8% gift (£40,000): chargeable estate £460,000 × 40% = £184,000. Family receives £601,000.
• 10% gift (£50,000): chargeable estate £450,000 × 36% = £162,000. Family receives £613,000.

Giving exactly 10% costs the family £12,000 net for a £50,000 charitable gift — and leaves them £12,000 better off than giving 8%. That cliff edge is why wills sometimes express the legacy as a formula rather than a fixed sum.

7. Pensions — and what changes in April 2027

Unused defined contribution pension funds have historically sat outside the estate for inheritance tax, which made them the last pot to spend. The government has announced that from 6 April 2027 most unused pension funds and death benefits will be brought within the inheritance tax net, with the personal representatives responsible for reporting and paying. Death benefits passing to a spouse or civil partner remain covered by the spouse exemption.

Until then, the arithmetic still favours drawing on ISAs and general savings before a pension where the goal is to reduce the estate. After April 2027 the calculation flips for many people, because the pot could face inheritance tax at 40% and then income tax in the beneficiary's hands where death occurs at or after age 75.

8. The small gift exemptions

These are modest individually but they are immediate, unconditional and available every year:

• Annual exemption: £3,000 a year, and one unused year can be carried forward, so up to £6,000 in a single year.
• Small gifts: £250 per recipient per year, to as many different people as you like (it cannot be combined with the annual exemption for the same person).
• Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Maintenance payments to a former spouse, a dependent relative or a child in full-time education.

A couple using both annual exemptions removes £6,000 a year from the estate — £2,400 of tax at 40% — with no seven-year clock and no paperwork beyond a note of what was given.

9. Life insurance written in trust

This is last because it does not reduce the tax; it funds it. A whole-of-life policy written in trust pays out to the trustees rather than into the estate, so the proceeds are not themselves taxable and are available quickly — useful because inheritance tax is generally due six months after the end of the month of death, often before probate releases the assets. Premiums may be covered by the annual exemption or by the normal expenditure out of income exemption.

Traps that undo the planning

• Gifts with reservation of benefit. Giving your home to your children while continuing to live in it rent-free leaves the full value in your estate. A market rent, properly documented, is a different matter — but it creates rental income for the recipient.
• The pre-owned assets rules can produce an income tax charge where someone continues to enjoy an asset they have given away.
• Losing the residence nil-rate band by giving the house away early, so there is no qualifying residential interest left in the estate.
• Frozen thresholds. The nil-rate band and residence nil-rate band are frozen, so estate growth alone pushes more families over the line.

Does any of this differ in Scotland?

Inheritance tax is a UK-wide tax: the £325,000 nil-rate band, the £175,000 residence nil-rate band and the 40% rate are identical in Scotland, Wales and Northern Ireland. What differs in Scotland is succession law — children and a surviving spouse have "legal rights" to a share of the moveable estate that cannot simply be written out of a will — and the property transaction taxes if assets are sold or transferred during your lifetime. Scottish income tax rates also affect any income a gifted asset later produces.

What to do next

Start by working out whether there is a bill at all: put the estate value, the home and the available bands into the inheritance tax calculator to see the position with and without transferred allowances. If a business, farm or unquoted shareholding is involved, the Business Property Relief calculator shows how the £1 million 100% band and the 50% rate above it change the figure.

Official guidance on rates, gifts and the forms executors need is at gov.uk/inheritance-tax, and the rules for claiming a deceased spouse's unused allowance are at gov.uk/guidance/inheritance-tax-transfer-of-threshold. Estate planning interacts with wills, trusts and family circumstances, so anything beyond using the standard exemptions is usually worth checking with a solicitor or qualified adviser before it is put in place.