Inheritance tax alert: 13 rules and allowances that could cut YOUR bill

Inheritance tax can be a complicated levy, with a range of reliefs, exemptions and thresholds leaving families unsure about how much they could owe.

Sarah Coles, head of personal finance at AJ Bell, has outlined 13 rules and allowances that could help families reduce their inheritance tax bills.

The guidance covers measures including spousal exemptions, nil rate bands, gifting rules and contributions from grandparents, while also highlighting upcoming changes to pensions and recent alterations to Business Property Relief.

Inheritance tax is generally charged at 40 per cent on the taxable portion of an estate above the available tax-free thresholds.

Assets passed to a spouse or civil partner are generally exempt from inheritance tax, meaning there is no tax charge on qualifying assets transferred between married couples or civil partners.

Individuals can also make use of the standard nil rate band, which allows up to £325,000 to be passed on without an inheritance tax charge.

A separate residence nil rate band of up to £175,000 can apply when a qualifying main residence is passed to direct descendants, including children, stepchildren or adopted children.

Together, the two allowances can provide an individual with up to £500,000 of inheritance tax-free allowances where the relevant conditions are met.

Married couples and civil partners can potentially benefit from transferring unused allowances from the first partner to die.

Where the relevant allowances are available in full, a couple could potentially pass on up to £1million before inheritance tax becomes payable.

Another allowance allows individuals to give away up to £3,000 each tax year without the gifts being counted as part of their estate for inheritance tax purposes.

The £3,000 annual exemption can be carried forward for one tax year if it was not used in the previous year.

Small gifts of up to £250 can also be given to any number of people, provided the recipient has not already received a gift covered by the £3,000 annual exemption.

Separate exemptions apply to certain wedding or civil partnership gifts, with the amount that can be given tax-free depending on the relationship between the donor and recipient.

Larger gifts can also potentially fall outside an estate through potentially exempt transfers, provided the donor survives for at least seven years after making the gift.

If the donor dies within seven years, some or all of the gift can still be taken into account when calculating the inheritance tax due.

LATEST DEVELOPMENTS

• DWP accused of PIP power grab as civil servants set to make key benefit decisions
• Martin Lewis warns buyers about three things that can stop mortgage applications
• HMRC takes £56million from savers through Lifetime ISA withdrawal penalties

Gifts made regularly out of surplus income can also qualify for an exemption, although they must meet specific HMRC conditions.

The payments must come from income rather than savings, must not reduce the giver's normal standard of living and must form part of a regular pattern of giving.

Keeping detailed records of these payments is important so the estate can demonstrate that the conditions for the exemption were met.

Grandparents and other family members can also contribute to a child's Junior ISA, although only a parent or guardian can open and manage the account.

Junior ISA contributions can be made up to the annual limit of £9,000, with contributions treated as gifts under the normal inheritance tax rules.

Pension rules are also set to change, with unused defined contribution pension pots expected to be brought within the scope of inheritance tax from April 2027.

The Government's planned changes mean some pension savings that currently sit outside the estate for inheritance tax purposes could instead be included when calculating the tax due.

The changes could therefore increase inheritance tax bills for some families, depending on the size and structure of their estates.

Charitable giving can provide another way to reduce inheritance tax.

Money or assets left to UK-registered charities are generally exempt from inheritance tax.

In addition, estates that leave at least 10 per cent of the relevant net estate to charity can benefit from a reduced inheritance tax rate of 36 per cent on the taxable portion.

Business Property Relief can also provide an inheritance tax exemption for certain qualifying business assets.

Some qualifying AIM-listed shares can attract Business Property Relief when they have been held for at least two years, although changes that came into force in April 2026 mean 100 per cent relief is no longer guaranteed in every case.

Anyone relying on Business Property Relief therefore needs to check whether their assets meet the current requirements.

Life insurance can also be structured in a way that helps reduce the inheritance tax burden on beneficiaries.

When a qualifying life insurance policy is written in trust, the payout can fall outside the estate for inheritance tax purposes.

This can prevent the insurance payout from increasing the value of the estate on which inheritance tax is calculated and can also allow beneficiaries to access the money without waiting for probate in many circumstances.

The timing of inheritance tax payments is another important consideration for executors.

Inheritance tax generally needs to be paid within six months of the end of the month in which the person died.

HM Revenue and Customs (HMRC) can charge interest on inheritance tax that remains unpaid after the relevant deadline.

Probate will generally not be granted until HMRC has confirmed that the inheritance tax due has been paid or suitable arrangements have been made to settle the bill.

Estates containing significant amounts of property can potentially qualify to pay the tax in instalments, allowing the liability to be spread over a longer period.

Families dealing with inheritance tax therefore have a range of allowances and exemptions available, but the rules vary depending on the assets involved, how they are transferred and the circumstances of the person giving them away.