How to Reduce Inheritance Tax: Gifting, Business Relief and Whole-of-Life Insurance Explained

(image created by AI; article written by me)

By George Taylor, CFA

Published: 01/10/2026

Gift it; invest it; insure it

Inheritance tax receipts hit a record £8.5bn in 2025/26 — up 80% in a decade — and are forecast to reach £15bn by 2030/31 as thresholds remain frozen and most pension funds enter the IHT net from April 2027. For those with a potential liability, there are ultimately three ways to address it: gift it, invest it, or insure it.

HMRC figures show that inheritance tax (IHT) receipts hit a record £8.5bn in the 2025/26 tax year – an 80% increase over the course of a decade.

IHT remains a relatively narrow tax, with fewer than one in twenty UK deaths resulting in a charge. But that proportion is rising, driven by higher house and stockmarket values and tax-free thresholds that remain frozen until 2030/31. The main nil-rate band (NRB) has been stuck at £325,000 since 2009, while the additional residence nil-rate band (RNRB) has remained at £175,000 since 2020.

And the tax take is set to rise further.

From 6 April 2027 – now just six months away – most unused pension funds will be brought into your estate for IHT purposes. The Office for Budget Responsibility expects IHT receipts to reach around £15bn a year by 2030/31, roughly 75% higher than today. We’ll revisit the pension changes, and what they mean for retirement and estate planning, in detail next week.

For now, we’re going back to basics.

When it comes to IHT planning, there are ultimately three broad ways to reduce or provide for a future liability: you can gift it, invest it or insure it.

In this week’s (slightly lengthier) blog, we look at each in turn – how they work, who they might suit and the key trade-offs to consider.

1. Gift It

Gifts fall into two sub-categories: direct gifts and transfers into trust.

Direct gifts

Direct gifts ‘do exactly what they say on the tin’. You transfer cash or assets to someone else, most commonly cash to a child or other dependant.

The appeal is clear:

• Simple - you simply transfer money or assets to the intended beneficiary,

• Tax efficient - there's no immediate IHT to pay, regardless of the amount,

• Cost effective - generally speaking, there are no upfront product or legal costs.

• You get to see the benefit – rather than leaving a legacy on death, you can watch the money being put to good use during your lifetime.

That last point is often the biggest motivation of all. Money can be more valuable to your family when they actually need it – perhaps to help with grandchildren’s school fees, fund a house move or extension, or simply ease the financial pressure of childcare and the rising cost of living.

There’s also something inherently rewarding about being around to see the difference your gift makes, rather than leaving an inheritance that, by definition, you’ll never get to witness.

One caveat: gifting assets other than cash (e.g. shares or a second property) can trigger a capital gains tax ('CGT') bill, whereas any gain is wiped out if you hold the asset until death (the so-called 'CGT uplift on death'). More on this later.

Some gifts are exempt from IHT from day one. The main examples include the annual exemption (£3,000 per person per tax year), normal expenditure out of income (potentially up to 100% of your surplus income, provided the conditions are met and there’s a regular pattern of gifting) and wedding gifts (up to £5,000 from a parent). We’ll be writing a dedicated blog on exempt gifts in the coming weeks.

Larger gifts are usually known as potentially exempt transfers (PETs). Survive seven years from making the gift and it falls outside your estate for IHT purposes altogether.

Die within seven years and it becomes a ‘failed PET’, meaning it is brought back into the IHT calculation on death. Generally speaking, a failed PET uses up your NRB before the rest of your estate. So, in many cases, the practical effect is still a 40% IHT charge elsewhere in the estate. Taper relief can reduce the tax payable on gifts above the available NRB once you survive three years, but the rules are fiddly and beyond the scope of this week’s blog.

The principal downside of a direct gift is loss of control. Once it’s gone, it’s gone.

And that’s where trusts can offer a potential alternative.

Gifts into trust

The other option is to make a gift into trust, typically a discretionary trust.

A discretionary trust allows you to name a range of potential beneficiaries – most commonly your children and any future descendants – with the trustees managing the funds on their behalf.

This addresses the main shortcoming of a direct gift: the trustees retain control over who benefits, when, and by how much. That can be particularly valuable where beneficiaries are young, may need support managing their financial affairs, or where there are concerns about future circumstances – for example, divorce or financial difficulties – because the assets are owned by the trust rather than being gifted directly to a beneficiary.

You can be a trustee yourself and therefore have a say in how the trust is managed, but you cannot benefit from the assets you’ve given away.

Of course, that additional control comes with some drawbacks:

• Costs – trusts generally involve additional costs to establish and administer,

• Lifetime IHT charge – transfer more than your available NRB into a discretionary trust and there can be an immediate 20% IHT charge on the excess. This is why many people limit gifts to their available NRB – typically £325,000 per person, or £650,000 for a couple where both have their full NRB available,

• Periodic and exit charges – the trust can face an IHT charge of up to 6% at each ten-year anniversary, broadly on the value above the available NRB, together with proportionate charges when assets subsequently leave the trust.

For those who want to retain a degree of control over how and when the money ultimately reaches their family, these can be trade-offs worth accepting.

And trusts can still be highly effective from an IHT perspective. As with a direct gift, the seven-year clock starts ticking from day one, and any subsequent growth on the assets is outside your estate immediately.

Consider an example.

Kate is 68 and her estate is comfortably above the IHT thresholds. She transfers £325,000 into a discretionary trust for the benefit of her children and any future grandchildren.

• As the gift is within her available NRB, there’s no immediate lifetime IHT to pay,

• After seven years, assuming 6% annual compound growth after costs, the trust is worth around £490,000 – growth of roughly £165,000,

• Having survived seven years, the original £325,000 gift is outside Kate’s estate, potentially saving £130,000 of IHT (40% × £325,000),

• The £165,000 of growth has been outside her estate throughout, representing a further potential £66,000 of IHT,

• In total, that’s a potential £196,000 less IHT than if the £490,000 had remained in Kate’s estate.

What about those periodic trust charges?

Using the same 6% growth assumption, the trust would be worth around £582,000 by its first ten-year anniversary. On a deliberately simplified calculation using today’s £325,000 NRB, a 6% charge on the £257,000 excess would be around £15,400.

Nobody enjoys writing HMRC a cheque for that sort of amount. But put it in context: it is relatively modest compared with the potential IHT saving achieved by moving the original capital – and all of its subsequent growth – outside Kate’s estate.

That combination of control today and potential IHT savings tomorrow is what makes trusts such a useful planning tool.

Please note, when investing, your capital is at risk - the value can go down as well as up. These figures are for illustrative purposes only and do not reflect actual investment returns, which can fluctuate and are not guaranteed. The Financial Conduct Authority does not regulate Trusts, Estate and Tax Planning.

2. Invest It

The second option is to invest in Business Relief (BR) qualifying activities, generally via schemes run by specialist managers, e.g. Triple Point, TIME Investments, Puma, Foresight, Octopus (more on them shortly), etc.

You invest in a private limited company run by the manager. That can seem unnerving, but the company has to be unquoted to qualify for the relief, and your funds are pooled with those of many other investors. Some of these companies run into the billions and would comfortably sit within the FTSE if they were listed.

The companies then invest in BR-qualifying activities, typically renewable energy (funding the build-out of solar, wind, biomass and hydro projects) or asset-backed lending (to property developers, local authorities, etc., secured with a 'first charge' over the asset).

The key benefit is that BR-qualifying investments are exempt from IHT after just two years, provided they're still held on death. Invest £200k for example (spread across several managers, to diversify), and after two years that's an effective IHT saving of £80k (40%). Job done.

The investment also stays in your name and is generally accessible, a useful fallback in the event of, say, soaring care costs in later life. 

100% relief applies to the first £2.5m of qualifying assets (since April 2026), so for most investors the cap won't bite.

The risks

The underlying activities are, generally speaking, fairly low risk. But that doesn’t mean the investment itself is low risk.

There are several risks to consider:

• Policy risk - the rules can change, and indeed they already have, with the new £2.5m cap and the rate of relief on AIM shares being halved from April 2026,

• Concentration risk - portfolios can have significant exposure to particular sectors, such as renewable energy, where government policy, funding, technology or investor sentiment could change,

• Liquidity risk - getting your money back isn’t always straightforward. At the time of writing, for example, Octopus has temporarily paused applications and withdrawals on its Inheritance Tax Service, meaning existing investors can’t currently access their money.

There’s also a fourth risk that we think is often overlooked: the risk of low returns.

These investments typically carry initial charges of around 1–2%, then target returns of perhaps 3–5% a year. Over a short period that may not matter much. Over 10, 15 or 20 years, it can matter enormously.

Consider an example:

Christian is 70 and in good health. According to the ONS, he can expect to live for around another 16 years. He’s considering investing £200,000 into a BR scheme, but his alternative is simply to leave the money invested in a diversified 80/20 equity/bond portfolio.

Assume:

• The BR scheme returns 3.5% a year, growing from £200,000 to around £347,000 over the 16 year timeframe. Assuming it qualifies for 100% BR at death, the full £347,000 passes to his beneficiaries, free from IHT,

• The diversified portfolio returns 7% a year, growing the same £200,000 to around £590,000,

• Even after deducting 40% IHT, that leaves around £354,000 for his beneficiaries.

In other words, despite suffering the full 40% IHT charge, the diversified portfolio still leaves more money behind – and does so without the discomfort of investing in private limited companies, where visibility and investor protections can be more limited, without the same liquidity constraints, and typically at a lower cost.

This example is a useful reminder that avoiding IHT doesn’t necessarily mean maximising what your family ultimately receives. If achieving the tax saving means accepting materially lower investment returns for a long period, the opportunity cost can eventually outweigh the tax benefit.

Of course, the numbers could turn out very differently. Investment returns aren’t guaranteed, Christian could live for a shorter or longer period, and BR rules could change. But that uncertainty is precisely why the investment decision and the tax saving need to be considered together.

So, where does that leave BR?

We think BR has a place, principally for older clients who have come to IHT planning later in life, or as a modest allocation within a wider estate-planning strategy. Where we do use it, we generally prefer to build up gradually – a ‘toe-dipper’ approach – allowing you to get comfortable with the investment, its nuances and its volatility before committing more.

Business Relief investments are high-risk products and are not suitable for the majority of retail investors. Investments in unquoted companies may be harder to sell and are likely to rise and fall more sharply in value. Tax rules could change in future, and the value of any tax relief will depend on your individual circumstances.

3. Insure It

The third option is whole-of-life (WoL) insurance.

In reality, we find this can be a tricky ‘sell’.

Imagine you’ve retired, the mortgage is paid off, the kids have flown the nest and your cashflow modelling shows you have more than enough money to last. Taking out life insurance – effectively insuring against your own death – probably isn’t top of the agenda.

There can also be a psychological barrier. Unlike gifting or investing for IHT purposes, WoL insurance doesn’t actually reduce the tax bill. Instead, you’re accepting that the IHT may eventually be due and putting money aside – via insurance premiums – so your family has the cash to pay it.

For some, that can feel a little like surrendering to the system (rather than ‘beating the system’).

But the maths can stack up surprisingly well, particularly if cover is taken out while you’re in good health.

WoL policies are also delightfully simple. You pay a regular premium and, provided you keep the policy in force, it pays a guaranteed lump sum on death – typically on second death for a couple – which can be used by your beneficiaries to meet some or all of the IHT bill.

There are some other useful features:

• Immediate cover – you’re insured from day one. There’s no two-year or seven-year clock to survive,

• Written in trust – the policy will normally be written in trust, meaning the proceeds sit outside your estate, don’t have to wait for probate and can usually be paid to the trustees relatively quickly. That’s particularly useful when IHT itself may need to be paid before probate can be obtained,

• Protected – eligible life insurance claims are 100% protected by the Financial Services Compensation Scheme (FSCS), including if the insurer fails,

• Tax-efficient premiums – where premiums are paid from surplus income and the relevant conditions are met, they may qualify for the normal expenditure out of income exemption.

The attraction, then, isn’t that insurance makes the IHT problem disappear. It’s that it provides the money to deal with it, without requiring you to give away capital during your lifetime or move it into higher-risk, costlier, and less liquid investments.

And, depending on your age and health, the amount ultimately paid out can be significantly more than the premiums you pay in.

What does it cost?

Returning to Christian. As he’s in good health, he can obtain £500,000 of single-life cover on standard terms for around £1,200 a month (as at 01/10/2026), with the premium guaranteed not to increase for the life of the policy – an important distinction, which we’ll come back to shortly.

That’s £14,400 a year, or just 2.9% of the sum assured.

At first glance, the maths looks ‘blowout’. Divide £500,000 by £14,400 and the simple ‘breakeven’ point – when the total premiums paid (‘money in’) exceed the guaranteed payout (‘money out’) – is almost 35 years away, by which time Christian would be around 105.

Of course, that’s not quite a fair comparison. Those premiums could otherwise have been invested, so we should factor in the opportunity cost too.

But even then, the numbers remain compelling.

Assuming the premiums could instead earn 6% a year, and allowing for IHT at 40% on the resulting investment, the effective breakeven point is still around 25 years away, at age 95. Even assuming a higher 8% return, it’s around 22 years away, at age 92.

Put another way, Christian has a life expectancy of around 86, yet he would need to live another six to nine years beyond that before investing the premiums instead would be expected to leave his family more money.

So, while the simple £500,000 ÷ £14,400 calculation overstates the advantage, the more realistic comparison still makes a strong case for insurance.

Guaranteed vs reviewable

You may have heard horror stories of WoL premiums becoming unaffordable in later life (when they’re needed most). These generally relate to reviewable policies, where premiums can start relatively low but increase – sometimes sharply – at future reviews.

We only ever recommend guaranteed policies, where both the premium and sum assured are fixed from outset. In Christian’s case, his premium starts at £1,200 a month and stays at £1,200 a month for life, while the £500,000 payout is guaranteed provided the premiums continue to be paid.

The main trade-off is inflation. £500,000 in 20 or 30 years’ time won’t have the same purchasing power as £500,000 today and, as asset values rise, the policy may cover a smaller proportion of the eventual IHT liability.

But that doesn’t necessarily make it less useful. In practice, WoL will typically form one part of a wider estate-planning strategy, sitting alongside gifting and other IHT planning rather than being expected to solve the entire problem on its own.

Where WoL can work particularly well?

WoL can be especially useful where your estate contains assets with large unrealised capital gains – for example, a buy-to-let property or a share portfolio held outside an ISA.

Selling or gifting those assets during your lifetime could crystallise a significant CGT bill. Hold them until death and, under current rules, that unrealised gain is generally wiped out for CGT purposes.

This can create an awkward trade-off. Gift the asset to reduce IHT and you may trigger CGT today – but if you then die within seven years, the gift may still be brought back into the IHT calculation. You could therefore pay CGT during your lifetime without ultimately achieving the IHT saving you were aiming for.

Insurance offers another route. You can retain the asset, preserve the potential CGT ‘reset’ on death and provide your beneficiaries with cash to help meet the resulting IHT bill.

WoL can also work particularly well where an estate is property-heavy but cash-light. IHT creates a liability, but not necessarily the cash to pay it. A policy written in trust can provide beneficiaries with a ready source of liquidity, reducing the pressure to find the money themselves or sell assets simply to meet the tax bill.

Life assurance plans typically have no cash-in value and, if premiums stop, cover may lapse. Some whole-of-life policies have reviewable premiums which may increase at future review dates.

Conclusion

As you can see, there’s no shortage of ways to mitigate or provide for a future IHT liability. And with pensions entering the IHT net from April 2027, the case for thinking about it sooner rather than later has only grown stronger.

The key point is that you don’t have to pick just one. In fact, a mix is often best.

That might mean making exempt direct gifts where you can, using a trust where larger gifts are involved and retaining control matters, adding a modest and gradual allocation to BR later in life – when the shorter time horizon makes the lower expected returns less of a drag – and using WoL insurance to make a meaningful dent in the remaining IHT bill without having to give away, sell or restructure illiquid or gain-laden assets.

Each has its strengths. Each has its drawbacks. And the right balance will depend on your age, health, family circumstances, assets, income and, importantly, how much control and flexibility you want to retain.

These different strands come together into what we call an ‘estate planning portfolio’ – a tailored blend of gifting, investing and insuring, designed around you rather than around any one tax product or strategy.

Happy Thursday.


Kind regards,
George

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