With thresholds frozen and asset values rising, Inheritance Tax (IHT) is catching more families in its net each and every year. Are your assets in danger of being distributed not just to your nearest and dearest, but also to HMRC? You’re not alone in holding this quiet concern.

HMRC collected a record £8.2bn in Inheritance Tax takings in 2024/25, and receipts for April – July of 2025 already total £3.1bn; it’s an increase of this time period last year and is clear evidence of fiscal drag at work.

So, how can you reduce the amount of your estate that will end up in the government’s account? Let’s explore some tried and tested ways that you can (legally!) reduce your Inheritance Tax liability in 2025.

Inheritance Tax in 2025: thresholds, rates, and what’s changing

The nil-rate band for staying under the remit of incurring Inheritance Tax is currently at £325,000, while the Residence Nil-Rate Band (RNRB) is at £175,000. Unsure of the difference? Essentially, the nil-rate band is the standard tax-free allowance on your estate, while the residence nil-rate band (£175,000) is an additional allowance that applies only if you leave your main home to direct descendants. So, say you leave your home to children or grandchildren, the standard £325,000 nil-rate band can be combined with the £175,000 residence nil-rate band, meaning up to £500,000 of your estate can pass free of Inheritance Tax.

The government has confirmed plans to keep these set thresholds frozen until the end of 2029/30 at the very earliest, which will undoubtedly exacerbate the fiscal drag in play as prices and portfolios continue to grow. Importantly, the headline IHT rate remains at 40% on the value above these very clear allowances.

However, don’t get too comfortable as there’s a major upcoming change: the government has set out proposals to bring unused pension funds and pension death benefits into the estate for IHT from April 2027 (via the Finance Bill 2025–26). This is a significant shift for families expecting pensions to sit outside IHT and should be discussed with your financial adviser.

How can I use HMRC gifting exemptions to reduce my Inheritance Tax liability?

There are a number of useful allowances that you can utilise to effectively reduce your taxable estate. Better yet, you can do them straight away and they’re easy to put in place. They include:

  • £3,000 annual exemption (per donor, per tax year).
  • £250 small-gift exemption (per recipient, per tax year).
  • Wedding gifts up to £5,000 for a child ( £2,500 grandchild/ £1,000 others).

They may be comparatively small sums, compared to the value of your growing estate, for example, but – when used consistently – these gifts compound over time and can materially reduce a future IHT bill.

Keep your Will and pension beneficiaries up to date

It’s common knowledge that a Will is an essential safeguard to carry out your wishes and distribute your hard-earned assets among friends and family after you’re gone – but this is not a one-time document you can draft then discard; quite the opposite.

Wills must be updated regularly or they risk being contested. This is why a current, well-structured Will ensures assets go to the right people and helps you use reliefs efficiently. 

Pensions, too, have their use in this area. In fact, pensions usually avoid Inheritance Tax altogether, but only when trustees have discretion and (critically) when your beneficiary details are correct. However, with the rules changing in April 2026, this is more pressing than ever before, making it more important than ever to check who you’ve listed and how benefits will be paid. If you’re at all unsure, get in touch with your dedicated financial adviser today.

Use Life Assurance in trust to cover a predicted IHT bill

A Life Assurance policy written in trust can provide the liquidity you need to pay an IHT without forcing the sale of property or investments. But first, the obvious question: What is that?

A life assurance policy written in trust is essentially a safety net. It pays out a lump sum upon your death that goes directly to your chosen beneficiaries, outside of your estate, which means it isn’t hit by Inheritance Tax itself. That money can then be used to settle the tax bill, meaning your family doesn’t have to sell the house, dip into savings, or liquidate investments just to cover the cost.

Speaking of trusts, they allow you to move assets outside your estate, protect beneficiaries, and control how wealth is used. They’re powerful but technical; the right structure depends on your family, assets, and timing – especially as rules are evolving alongside the threshold freeze and pensions reform.

If you’re interested in learning more about this, please get in touch with us directly and we’ll be happy to outline all the options available to you.

Act early to protect your estate

Early, methodical planning, such as gifting, ensuring an up-to-date Will, and (where suitable) investing in trusts, can meaningfully cut what your estate pays in Inheritance Tax. 

Want to put your Inheritance concerns to us directly? Send your questions to our probing new podcast, Beyond the Boardroom. Email us at info@matthewdouglas.co.uk or get in touch with our trusted team of advisers today to explore your options and safeguard your assets.