These money strategies could slash your IHT bill

As pensions become subject to inheritance tax (IHT) from April 2027, many people will now find themselves breaching the inheritance tax allowance, while others face a larger bill than anticipated. However, there are a few options that could ease the pain when the new tax rules hit.

Inheritance tax is currently charged at a rate of 40% after any tax-free allowances and is due within six months of the person’s death. If the assets are held in things like funds or cash, this money can be paid out from the estate. But the situation gets slightly more complicated when property is passed down, and the inheritance tax either needs to be paid from some other assets or the property needs to be sold so the tax bill can be paid.

With pensions now counting towards the estate for IHT purposes, the government estimates that 8% of estates will be affected.

Here’s a few strategies that might allow for more money to be passed down tax free.

Prioritising pension use

Spending your pension may seem like a pretty obvious solution to not facing inheritance tax on your pot. But in the past, pensions have been an asset that people tend to hang on to in retirement if they can. Instead, they would live off savings accounts like ISAs. These are helpful because they don’t face any income tax when people withdraw from them.

But with pensions facing inheritance tax as well as income tax, this situation has now changed. ISAs are considered part of your estate, so they will be subject to inheritance tax but not income tax. Meanwhile, pensions will face both inheritance tax and income tax when they are passed down, depending on the recipient's other income.

This means that ISAs will preserve more of their value when they are passed down than pensions will. Instead, you could keep your ISA savings in place and start drawing from your pension in retirement. You could take 25% of your pension pot tax free and can get some added relief from your annual income allowance.

Consider downsizing

If a large amount of your wealth is tied up in your home, downsizing may save your inheritors some cost in the future. And it can provide other benefits too: a smaller home could mean less money on bills and might free up some of the time you’ve previously spent maintaining the property.

Homes do allow for some leeway outside the usual £325,000 allowance for someone’s estate. If you own your home and are passing it down to your children or grandchildren, your allowance will increase from £325,000 to £500,000. If you are married or in a civil partnership, each partner gets this allowance so it will expand to £1 million. However, if your home is valued over £2 million, you do not get the extra exemption. If you pass the home on to your spouse or civil partner, there will not be tax regardless.

If you planned to pass on the home to your children, you could consider using the money released from selling your home and moving to a cheaper property to help them with a lump sum gift instead. By gifting to them now, instead of after you have passed, you could avoid paying any tax on the assets. This is because gifts are not liable for inheritance tax if they were given seven years or more before the death of the gifter.

It may seem like a drastic step to take to avoid a future tax, but it can make a big difference in what you are able to pass on. And while you may feel settled in your home, downsizing could also open opportunities for yourself, such as travel or pursuing hobbies that would otherwise be out of budget.

Investing through a trust

Another option that some may consider is placing assets in a trust. By using a trust, instead of gifting the money directly, there can be a bit more control over what happens to the funds. When assets are placed in a trust, they are ring fenced from your estate and placed in the control of the trustee. Later, the trustee will be the one to distribute the assets.

However, it’s important to be aware of the taxes around trusts, and the rules can be complex. Depending on how much you place in the trust, you could face IHT up front (though at a lower rate), and if the trust stays in place without being distributed for over a decade, you can face additional charges. If you plan to pass down a business or farm, there are some exceptions here that may be beneficial.

Placing a home in a trust can also come along with complications. For example, if you continue to live at this home, it will still fall under your estate and be subject to inheritance tax.

Because of the complicated rules around trusts, getting professional advice will be an important step for most. But the rules around holding businesses or agricultural property in a trust change in April 2026, so if this is something you’re considering, it is better to start sooner rather than later.

Gifting funds

Gifting money is arguably the simplest way to avoid a high inheritance tax bill, but it does come along with serious implications, and you still need to be aware of how you could be taxed – as well as the impact it can have on your own finances. It’s important to remember that once you gift assets, they are no longer legally yours, and the recipient can do what they please with the gift.

You can gift £3,000 per year exempt from tax. These exemptions are for an individual, so a couple could gift double this amount exempt from tax. While there's no maximum for the amount you can gift, they could be subject to inheritance tax if the gifter dies sooner than seven years after the assets were passed over. But this does work on a sliding scale beginning at three years, where IHT drops from 40% to 32%.

You can also give gifts tax-free if they are part of your normal expenditure, such as paying your child’s rent. These gifts must come from your income and leave you with enough income to maintain your normal standard of living without needing to pull on other sources.

Regardless of how you choose to gift, keeping good records can be an important part of the process to prove to the HMRC that these gifts should be exempt from tax, especially if it is coming from something like a normal expenditure.

Using life assurance

Some of those who do plan to pass on property, but don’t want to stick the next generation with the tax bill, are taking out life assurance policies to cover the future cost. Life assurance is similar to life insurance but offers coverage for as long as the premiums are met, instead of for a set period. This means it can be held until the estate holder passes away, and then the money paid out can be used to cover the inheritance tax bill for the estate.

While this is an option for large estates, it can be expensive and mean a long period of payments. But it can solve the liquidity issue that houses and property run into.