How to avoid inheritance tax legally: gifts, allowances and planning
The gift exemptions, allowances and rules that legally reduce inheritance tax in 2026/27, from the £3,000 annual exemption to charity gifts and trusts.
How much inheritance tax would your estate actually pay?
For most people the answer is nothing, because inheritance tax is only charged on the part of an estate above the available thresholds, and HMRC's latest statistics show that 4.72% of UK deaths in 2023/24 resulted in a charge. The standard threshold, the nil rate band, is £325,000, and GOV.UK's thresholds table shows it fixed at that level until 5 April 2031. Anything above the threshold is normally taxed at 40%.
Two further allowances do much of the work for families. If you leave your home, or your share of it, to children (including adopted, foster or stepchildren) or grandchildren, GOV.UK says your threshold can rise to £500,000, because the residence nil rate band adds up to £175,000, although it is reduced by £1 for every £2 by which the estate is worth more than £2 million, and the Finance Act 2026 froze it until 5 April 2031 as well. Anything you leave to a husband, wife or civil partner is exempt, and any threshold left unused on the first death can be added to the survivor's, so a married couple or civil partners can pass on up to £1 million between them, provided the survivor's executors claim the transfer within 2 years of the second death. Our guide to the inheritance tax threshold for 2026/27 sets out each allowance and how it is claimed.
Which gifts are exempt from inheritance tax straight away?
Several kinds of gift are exempt from the moment you make them, so they never depend on the 7 year rule, and GOV.UK's page on gifts and the inheritance tax allowances sets them out.
Annual exemption: you can give away £3,000 in total each tax year, either to one person or split between several, and you can carry any unused part forward to the next tax year only.
Small gifts: you can give as many gifts of up to £250 per person as you like each tax year, as long as you have not used another allowance on the same person.
Wedding and civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else, and this can be combined with any other allowance for the same person except the small gift allowance.
Spouses, charities and political parties: GOV.UK says there is no inheritance tax on gifts to a husband, wife or civil partner who lives in the UK permanently, provided you are legally married or in a civil partnership, and HMRC's manual frames the one exception as a limit that applies where you are a long-term UK resident and they are not. Gifts to charities and political parties are exempt too.
What are gifts out of surplus income?
Gifts out of surplus income are regular gifts paid from your income rather than your savings, and GOV.UK says there is no limit to how much you can give this way, provided you can afford the payments after meeting your usual living costs and you pay them from your regular income. HMRC calls this the exemption for normal expenditure out of income, and GOV.UK's examples include paying rent for your child and helping an elderly relative with their living costs.
The conditions are stricter than the name suggests. HMRC's manual on normal expenditure out of income says a gift only qualifies where it formed part of your normal expenditure, was made out of income and left you with enough income to keep up your usual standard of living, so the exemption fails if you had to dip into capital to pay your own bills. "Normal" means normal for you, which usually shows as a pattern of giving, and income means income after Income Tax. HMRC's view is that, without evidence to the contrary, income left unspent becomes capital after two years, so gifts funded from several years of saved income are unlikely to qualify.
Because your executors claim the exemption after your death, the evidence matters as much as the gifts. GOV.UK asks you to record what you gave, who you gave it to, its value and when you gave it, and for this exemption a yearly note of your income and normal spending helps too, since those are the figures HMRC tests the claim against.
What is a potentially exempt transfer?
A potentially exempt transfer is a gift to another person that is not covered by one of the exemptions above, and it becomes fully exempt once you have lived for 7 years after making it. Most family gifts of money, property or possessions fall into this category, including the hidden gift made when you sell something to a relative for less than it is worth, because GOV.UK counts the difference in value as a gift.
If you die within the 7 years, the gift is added back when your estate is valued and uses up your £325,000 nil rate band before the rest of the estate does, so even a gift that pays no tax itself can leave less of the band for everything else. Tax is only charged on the gifts themselves where their total in those 7 years exceeds the nil rate band, and taper relief then reduces the rate on gifts made between 3 and 7 years before death, which our guide to the 7 year rule and taper relief explains with the full rates. GOV.UK adds that once more than £325,000 has been given away in the 7 years, the people who received the later gifts may have to pay the tax on theirs.
Can you give away your house and still live in it?
You can, but only on terms, because GOV.UK says that if you carry on living in a home you have given away you need to pay the new owner a market rent, set by what similar local properties let for, and cover your share of the bills, and otherwise it counts as a gift with reservation of benefit, which is added back to the value of your estate when you die. The 7 year rule does not apply to a gift with reservation, and GOV.UK's guide to passing on a home gives one exception, which is that you do not have to pay rent if you give away only part of the property and the new owners also live there.
The same principle applies to other assets, and GOV.UK's examples include a caravan you still use for free holidays and a painting that stays on your wall. Where rent is paid, HMRC's manual looks for an arm's-length bargain on normal commercial terms with both sides independently advised, and it warns that arrangements which escape the reservation rules can instead fall under a separate Income Tax charge on pre-owned assets, so this is an area where advice before you act is usually worth paying for.
How does leaving money to charity reduce inheritance tax?
A gift to charity in your will reduces inheritance tax in two ways. The gift itself is exempt, so it is taken off the value of your estate before the tax is worked out, and if you leave 10% or more of the net value of your estate to charity, GOV.UK says the estate can pay a reduced rate of 36% instead of 40% on some assets, where the net value means the estate's total value minus its debts.
The 10% test is more technical than it looks. HMRC's manual on the reduced rate for gifts to charity explains that it only applies to tax charged on death, and it accepts that a will can word a charitable gift so that it always meets the test, which a solicitor drafting your will can do for you. GOV.UK's reduced rate calculator shows roughly how much would need to go to charity.
How do trusts, life insurance and pensions affect inheritance tax planning?
Trusts: putting assets into most trusts during your lifetime is a chargeable transfer rather than a potentially exempt one, and GOV.UK's guidance on trusts and inheritance tax says tax is due, at 20% if the trustees pay it, on the amount by which your transfers into trust, added to any chargeable gifts in the previous 7 years, exceed £325,000, with further charges possible at each 10-year anniversary and when assets leave the trust. Our guide to discretionary trusts explains when people accept those costs.
Life insurance in trust: a life policy written in trust pays the trustees for your beneficiaries rather than paying into your estate, so the payout normally falls outside your estate for inheritance tax, and MoneyHelper notes that whole of life policies are often used in inheritance tax planning. Our guide to life insurance in trust explains how it works.
Pensions: for deaths on or after 6 April 2027, HMRC's technical note says most unused pension funds and pension death benefits will count towards the value of the estate under the Finance Act 2026, although death in service benefits are excluded and pension money going to a spouse, civil partner or charity stays exempt. Our guide to pensions and inheritance tax from April 2027 covers what that means in practice.
Business and farm assets: from 6 April 2026 the 100% rate of agricultural and business relief applies only to the first £2.5 million of combined qualifying property, with 50% relief above that, and shares on markets such as AIM get 50% relief only, so an estate that relies on these reliefs now has more reason to take specialist advice.
Where does lawful planning end and abusive avoidance begin?
Using the exemptions and reliefs that Parliament has written into the law is ordinary planning, and nothing in it is hidden from HMRC, since your executors report the gifts and claim the exemptions openly after your death. Arrangements contrived to get round the rules are treated very differently, because the general anti-abuse rule covers inheritance tax for arrangements entered into on or after 17 July 2013, and HMRC's guidance on it is aimed at arrangements that are abusive.
Inheritance tax planning is also separate from how a council assesses care fees. A gift that is safe for inheritance tax after 7 years can still be treated as deprivation of assets if the council decides that avoiding care charges was a significant motivation in its timing and that you could reasonably have expected to need care when you made it, as the statutory guidance for councils in England explains, and our guide to deprivation of assets and care home fees covers that test.
GOV.UK suggests professional advice from a solicitor or tax adviser about what you can give away tax free, and HMRC's own helpline cannot advise on how to pay less tax. Advice is usually worth paying for before a large gift, a gift of property or setting up a trust, or where business assets, farmland or substantial pensions are involved, whereas using the annual and small gift exemptions rarely needs it. That means a solicitor regulated by the SRA, a STEP practitioner or an independent financial adviser, and because inheritance tax is a UK-wide tax the same rules apply in Scotland and Northern Ireland.
How to avoid inheritance tax legally: what to do next
Add up roughly what you own, including your home, savings, investments and any life cover not written in trust, and set it against the allowances that apply to you.
Use your £3,000 annual exemption each tax year if it suits you, and check before 5 April whether last year's allowance is still unused.
If your income regularly exceeds your spending, think about whether regular gifts from it would work for you, and keep a yearly record of income, spending and gifts.
Keep a gifts log with the date, the recipient, the value and the exemption used, and tell your executors where it is.
Look at your will for gifts to charity and whether the 10% level for the 36% rate is within reach.
Check whether any life insurance is written in trust and whether your pension nomination forms are up to date ahead of April 2027.
Take advice before giving away property, setting up a trust or relying on business or agricultural relief.
Your executors will also have to find and tell every bank, utility, insurer and subscription you held, which is far quicker when you have left a clear record of your accounts alongside your gifts log, and if that work does fall to your family, Legacy Trail's free notification service can contact the private-sector companies for them.
Frequently asked questions
Each tax year you can give away £3,000 under the annual exemption, plus the previous year's allowance if you did not use it, and any number of gifts of up to £250 per person to people who have not had another exempt gift from you. Regular gifts from surplus income have no fixed limit, and gifts to a charity, or to a spouse or civil partner who lives in the UK permanently, are exempt whatever the amount.
A potentially exempt transfer is a gift to another individual, which pays no tax when it is made and becomes fully exempt if you survive it by 7 years. A chargeable lifetime transfer is usually a gift into a trust, which can be taxed at 20% straight away on the amount above the nil rate band, with more to pay if you die within 7 years.
Yes, if the payments are regular, come out of income rather than savings and leave you enough to keep up your usual standard of living, in which case there is no upper limit. HMRC decides whether the conditions were met after your death, so a record of your income, spending and gifts over the years is what allows your executors to claim the exemption.
Yes. Gifts to charity in a will are exempt, and if they amount to at least 10% of the net estate the rate on some assets falls from 40% to 36%. GOV.UK's reduced rate calculator shows roughly how much would need to be left to charity to reach that 10% figure.
Using the exemptions, reliefs and allowances in the law is legal and common. Abusive arrangements can be counteracted under the general anti-abuse rule, which has covered inheritance tax since July 2013, so a packaged scheme that promises large savings deserves independent advice before you commit to it.
In most cases it has no limit. HMRC's manual gives one exception, which is where the person giving is a long-term UK resident but the spouse or civil partner receiving is not, and the limit that then applies covers lifetime gifts and gifts on death together, so advice is worth taking if that describes you.
This article is for general information only and does not constitute legal advice. Individual circumstances vary. If you are dealing with an estate, consider taking advice from a solicitor who specialises in probate. For other guidance specific to your circumstances, speak to a funeral director, Citizens Advice, or a regulated financial adviser.