How to Reduce Inheritance Tax in 2026: A Practical Guide

Inheritance tax is increasingly unavoidable for middle and upper-middle class families in the UK. The nil rate band has been frozen at £325,000 since 2009. The residence nil rate band adds £175,000 for homes passed to direct descendants, taking the effective threshold to £500,000 per person (£1 million for couples). But rising property values and accumulated savings mean more estates than ever are caught.

This guide covers the main IHT planning tools available in 2026, what changed in the Budget, and where EIS fits in the picture.

What changed in April 2026

The 2025 Autumn Budget made significant changes to Business Property Relief (BPR) and Agricultural Property Relief (APR). From April 2026, a combined 100% relief limit of £2.5 million per person applies — above that threshold, relief is limited to 50%. For estates with significant business or agricultural assets, this is a meaningful change.

Separately, AIM shares — which previously qualified for 100% BPR after two years — now only qualify for 50% relief. This significantly reduces the appeal of AIM portfolios as an IHT planning tool and pushes investors toward alternatives, including EIS.

The main IHT planning tools

Gifts and the seven-year rule

Outright gifts fall outside the estate if the donor survives seven years. Gifts made three to seven years before death attract tapered relief. Annual gift exemptions (£3,000 per year, plus unused allowance from the prior year) allow regular, small gifts free of IHT immediately. Wedding gifts, small gifts (£250 per person), and gifts out of surplus income are also exempt. For those in good health with a long time horizon, systematic gifting is the simplest IHT strategy.

Trusts

Assets placed in a discretionary trust are outside the settlor's estate (subject to the seven-year rule on entry). Trusts are complex, incur ongoing costs, and require careful legal drafting. They are appropriate for larger estates with specific succession planning needs. The periodic and exit charges that apply to trusts have become more significant since recent Budget changes.

Business Property Relief and EIS

EIS shares held for at least two years qualify for 100% Business Property Relief — meaning they fall entirely outside the estate for IHT. This remains unchanged after the 2026 Budget. The £2.5 million cap on combined BPR applies to other business assets; EIS shares held by individual investors are not affected by this cap in the same way as trading business interests.

For investors concerned about IHT, EIS offers a unique combination: income tax relief at 30% on investment, CGT-free growth, and IHT exemption after two years. No other mainstream investment vehicle provides all three simultaneously.

AIM portfolios — less attractive after April 2026

Before April 2026, AIM shares qualifying for BPR were a popular IHT planning tool — liquid, within ISAs, and exempt after two years. The cut from 100% to 50% relief significantly reduces their effectiveness. On a £500,000 AIM portfolio, the IHT saving is now £100,000 (50% at 40%) rather than £200,000. The relative attractiveness of EIS — which retains 100% relief — has increased.

Life insurance in trust

A whole-of-life policy written in trust pays out directly to beneficiaries without passing through the estate. The payout can be used to cover the IHT bill, preserving other assets. This is not a reduction strategy — it is a funding strategy. It does not reduce the IHT owed; it provides liquidity to pay it.

The honest picture

Most IHT planning works best when started early. The seven-year rule requires longevity. EIS requires a two-year holding period and involves investment risk. Trusts require assets to be given away now. None of these strategies delivers immediate IHT elimination with no cost or complexity.

For most families, a combination of annual gifting, a reviewed pension strategy (pensions remain outside the estate for now), and a consideration of EIS for the investment portfolio represents a practical starting point. Complex estates — those above £2 million or with significant business assets — warrant specialist advice from an IHT-experienced financial planner and solicitor.