3 underused Inheritance Tax strategies that could help you pass on more of your wealth

A growing number of estates are becoming liable for Inheritance Tax (IHT) or paying higher amounts. This is primarily due to frozen IHT thresholds combined with increases in the value of assets such as property.

According to the most recent figures released by HMRC, IHT receipts for April 2025 to December 2025 were £6.6 billion, which is £0.2 billion higher than the same period last year.

What’s more, from April 2027, most unused pension funds and pension death benefits will be included in IHT calculations. HMRC estimates that, as a result of these changes, 10,500 estates could pay IHT for the first time, and around 38,500 estates could pay more IHT than they would under the current rules.

Indeed, a new survey by Standard Life has revealed that financial advisers estimate 40% of their clients will need to review their existing estate plans in light of the upcoming changes to IHT rules.

If you want to make sure that your loved ones receive as much of your wealth as possible, keep reading to discover three underused IHT strategies that could help you reduce a potential IHT bill.

1. Downsizing relief

Your home might be one of the most valuable assets you have. As such, moving to a smaller property as you get older could be a useful way to free up some money for a more comfortable retirement lifestyle, to fund new projects, or cover care costs.

Downsizing relief (also known as the “downsizing addition”) protects you from losing a valuable IHT allowance – the residence nil-rate band – if you move to a less valuable property.

The residence nil-rate band is an IHT allowance of up to £175,000 (2025/26) that applies when you pass on your main residence to direct descendants, such as children or grandchildren. This allowance is available in addition to the standard nil-rate band, which is up to £325,000 in the 2025/26 tax year.

As such, the residence nil-rate band could increase your total IHT-free threshold to £500,000. Moreover, any unused allowance can be claimed by your surviving civil partner or spouse, potentially enabling couples to pass on up to £1 million without an IHT charge.

If you qualify for a downsizing addition, your estate may still be able to benefit from the residence nil-rate band even if you no longer own a qualifying home when you die. In other words, this underused IHT relief could allow you to downsize without giving up the tax relief you would have been entitled to had you not moved, provided:

• You previously owned a qualifying residential property
• You sold, downsized, or disposed of this property on or after 8 July 2015
• At the time of your death, you no longer own a qualifying residential property, or you own one of lower value than your previous home
• You leave assets of equivalent value to direct descendants
• The executors of your estate make the claim.

It’s important to note that if your estate exceeds £2 million, the residence nil-rate band tapers, reducing by £1 for every £2 over the threshold. For estates worth £2.35 million or more, the entire allowance is lost.

However, if you downsized and your estate falls below £2 million when you die, the taper no longer applies, and you can usually claim the full residence nil-rate band via downsizing relief (provided that you meet the criteria outlined above). This is because the taper is assessed at the date of death, rather than historically.

2. Share loss relief

IHT is usually calculated based on the value of assets on the date of death. This means that if you inherit investments that have since dropped in value, the estate still pays IHT based on the initial valuation.

However, share loss relief allows executors to reclaim some of the IHT paid on qualifying investments if they sell them at a loss within 12 months of the date of death.

Where this relief applies, IHT calculations are based on the actual sale price, rather than the valuation given at the time of the benefactor’s death. This reduces the total value of the deceased person’s estate, resulting in a lower IHT bill.

Share loss relief only applies to qualifying investments, which include:

• Shares or securities listed on recognised stock exchanges, such as the London Stock Exchange
• Open-ended investment companies (OEICs)
• Holdings in authorised unit trusts.

The executors of the estate must submit a claim to HMRC within four years from the end of the 12 months following the date of death. They will also have to choose whether to transfer the investments directly to the beneficiaries or sell them during administration.

Passing the investments to the beneficiaries allows them to choose whether to hold on to the shares and wait for the markets to recover or sell them and offset any losses to reduce Capital Gains Tax (CGT), potentially saving 18% to 24%.

In contrast, if the executors sell the shares and claim share loss relief, they could save 40% (the standard IHT rate in 2025/26).

As you can see, it’s generally more valuable to claim share loss relief than CGT relief. However, it’s crucial to seek financial advice about how to balance IHT and CGT liabilities, as this can be complicated if large or complex portfolios are involved.

3. Gifts out of surplus income

Each year, you’re entitled to various gifting allowances and exemptions that could help you reduce your taxable estate by giving away assets.

For example, you might be aware of the annual exemption, which allows you to gift a total of £3,000 in the 2025/26 tax year without triggering an IHT charge.

The “gifts out of surplus income” rule is one of the most valuable, yet frequently overlooked, IHT exemptions available. The key benefits include:

• The “seven-year rule” does not apply – Unlike most lifetime gifts, you don’t need to survive for seven years after giving away assets for them to be totally free of IHT.
• There is no limit on how much you can give – Provided that it genuinely comes from surplus income.
• Your savings and investments remain intact – Giving gifts from your income allows you to preserve your savings and retain financial security.

FTAdviser has revealed that over the past three years, only 2% of estates have used this IHT mitigation rule when gifting. However, with pensions due to be brought within the scope of IHT from April 2027, giving gifts out of surplus income may become an even more useful way to pass on wealth tax-efficiently.

If you want to make the most of this exemption, you’ll need to meet all three conditions:

• Gifts must be made out of your income, not from capital or savings
• Gifts must be made regularly, such as monthly or annually
• Making these gifts should not reduce your standard of living.

Get in touch

We can help you navigate upcoming Inheritance Tax rule changes and ensure you don’t miss out on valuable allowances, enabling you to pass on more of your wealth to loved ones.

To find out more, please get in touch.

Email helpme@aspirellp.co.uk or call 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.