How to Reduce Inheritance Tax in 2026: Planning Tools and What Changed in the Budget

Inheritance tax is no longer a problem only for the genuinely wealthy. The nil rate band has been frozen at £325,000 since 2009. House prices have doubled in many parts of the country. Pension pots have grown. And the 2025 Autumn Budget made significant changes that took effect from April 2026 — changes that alter the relative effectiveness of several widely used IHT planning strategies.

This guide covers how IHT works in 2026, what the Budget changed, and what the main planning tools available now are.

How inheritance tax works

IHT is charged at 40% on the value of an estate above the available thresholds.

The residence nil rate band tapers for estates above £2 million — reducing by £1 for every £2 above that figure. An estate of £2.35 million or more loses the RNRB entirely per person.

IHT is due within six months of death. Probate cannot be granted until the tax is paid. Illiquid estates — where value is concentrated in property, business interests, or investments that cannot be quickly sold — face a practical funding problem as well as a tax one.

What changed in the 2025 Budget

Three changes took effect from April 2026 that materially alter IHT planning.

Business Property Relief — cap introduced

BPR previously provided 100% relief on qualifying business assets with no upper limit. From April 2026, a combined Business Property Relief and Agricultural Property Relief cap of £2.5 million per person applies. Assets above this threshold attract only 50% relief.

For a business owner with £5 million of trading company shares in their estate: the first £2.5 million is fully exempt. The remaining £2.5 million attracts 50% BPR, leaving £1.25 million exposed to IHT at 40% — a £500,000 bill that previously would have been £0.

AIM shares — BPR cut from 100% to 50%

AIM-listed shares qualifying for BPR were a popular IHT planning tool before April 2026. Two years' holding, full exemption, relatively liquid compared to unlisted investments.

From April 2026, BPR on AIM shares is capped at 50%.

The main IHT planning tools in 2026

Pensions — IHT treatment changing from April 2027

Defined contribution pension pots have historically been outside the estate for IHT. From April 2027, unused pension assets will be brought into the scope of IHT for the first time.

This is not yet in force. But it needs to be planned for now. Business owners and high earners who have built large pension pots as an IHT strategy have less than a year to review those arrangements.

Gifts — simplest and most certain

Outright gifts made more than seven years before death fall outside the estate entirely. Gifts between three and seven years before death attract tapered relief.

Annual exemptions — immediately outside the estate:

• £3,000 per person per year (plus unused allowance from the prior year — maximum £6,000 in one year).
• Small gifts: £250 per recipient per year.
• Wedding gifts: £5,000 from a parent, £2,500 from a grandparent.
• Gifts from surplus income — potentially unlimited if structured correctly.

For people in good health, systematic annual gifting is the most straightforward IHT strategy. It requires no complexity, no ongoing costs, and no investment risk. It just requires time — and the willingness to give assets away now.

Trusts

Discretionary trusts remove assets from the estate (subject to the seven-year rule on entry). The costs: a potential 20% entry charge on assets above the nil rate band, periodic charges every ten years, and exit charges when assets leave. Plus ongoing legal and accounting costs.

Trusts are appropriate for larger, more complex estates — particularly where there are minor beneficiaries, blended family dynamics, or specific succession objectives. They need specialist legal drafting. The relative tax efficiency depends on individual estate structure and size.

Business Property Relief investments

Following the Budget changes, the BPR landscape has shifted. What remains:

• Unlisted trading company shares: Retain 100% BPR for investors, subject to the £2.5 million combined cap that primarily affects business owners holding shares in their own trading companies. Individual investors holding unlisted shares through EIS or similar investments are not typically subject to the same cap mechanics — though the post-Budget rules require specialist advice to navigate correctly.
• EIS shares: EIS investments are in unlisted trading companies. They qualify for 100% Business Property Relief after a two-year holding period. Following the reduction of AIM BPR to 50%, EIS has become relatively more attractive as an IHT planning vehicle compared to AIM portfolios.

This does not mean EIS is a safe IHT tool. EIS investments are illiquid, high-risk, and most early-stage companies do not return investors' capital. The IHT benefit is real — but it comes attached to a significant investment risk. AIM portfolios, despite the reduced relief, remain more liquid. Any IHT planning decision that pits AIM against EIS needs to weigh the full risk profile of both, not just the tax efficiency.

Life insurance in trust

A whole-of-life policy written in trust pays out to beneficiaries outside the estate. It does not reduce IHT — it provides the cash to pay it. For estates where value is tied up in illiquid assets (property, business, farm), this prevents a forced sale to fund the tax bill.

The cost is the ongoing premium. The benefit is certainty — regardless of what the estate's value and IHT liability turns out to be, the money is there to pay it.

Common IHT mistakes

• Starting too late. The seven-year rule requires longevity. A gift made three years before death reduces IHT. A gift made seven years before death eliminates it. These strategies work best when started at 60, not 80.
• Assuming AIM portfolios still work as before. They do not. The Budget change to 50% BPR is permanent. Existing AIM IHT portfolios need reviewing.
• Ignoring the pension change. April 2027 is not far away. Business owners and high earners with large pension pots built specifically for IHT efficiency need to review now.
• Underestimating the liquidity problem. Even with planning, estates need cash to pay IHT before probate. The practical question of how the tax gets paid — not just whether it arises — needs to be part of any plan.
• Treating IHT planning as a single-tool problem. Gifts, trusts, insurance, and BPR investments each do different things. Most effective plans combine several approaches rather than relying on one.

AIM IHT portfolios are now half as effective as they were. Investors who built them specifically for IHT planning need to reassess.