Creating an estate plan allows you to retain control over how your wealth is distributed when you’re gone. By making these important decisions now, you can ensure that you leave a legacy you’re proud of. The wealth you leave behind could also help your loved ones work towards their own financial goals.

Finding ways to mitigate Inheritance Tax (IHT) is an important part of estate planning as it allows you to leave a larger portion of your wealth to your beneficiaries. You may be especially concerned about IHT planning after chancellor Rachel Reeves announced plans to make pensions liable for IHT in her October 2024 Budget.

Your home is likely one of your largest assets so finding ways to reduce IHT on it is crucial, but this can be difficult.

Read on to learn more.

You may benefit from the residence nil-rate band when passing your home to a direct descendant

IHT may be payable on certain assets from your estate. Fortunately, you can pass a portion of your wealth to beneficiaries without tax.

In 2025/26, you have a nil-rate band of £325,000 and any wealth up to this threshold is IHT-free. You may also benefit from up to £175,000 residence nil-rate band when passing your main home to a direct descendant such as a child or grandchild.

This means you may be able to pass on up to £500,000 without triggering an IHT charge.

Additionally, you can pass your entire estate to a spouse or civil partner without IHT, and they can claim your unused nil-rate bands.

As a result, you may be able to pass on up to £1 million between you.

Using the nil-rate bands and planning as a couple could make it easier to reduce the IHT your family pays on your home. However, it’s important to note that this extra IHT-free threshold only applies when passing the property to a direct descendant.

What’s more, you can’t use the residence nil-rate band on a property that isn’t your main home.

It’s important to understand these rules so you can make effective use of the residence nil-rate band.

The “gifts with reservation of benefit” rule may apply if you pass your home to beneficiaries while you’re alive

Gifting wealth to your loved ones while you’re alive may be an effective way to reduce the size of your taxable estate and mitigate IHT, but there are complex rules to consider.

In 2025/26, the first £3,000 you gift is automatically IHT-free. This is your gifting annual exemption.

Any gifts that exceed your annual exemption are considered “potentially exempt transfers” (PETs), which fall outside your estate for tax purposes if you survive for seven years after giving the gift. This is called the “seven-year rule”.

In some cases, passing a property to your beneficiaries while alive, and benefiting from the seven-year rule, could be an effective way to reduce IHT. However, the “gifts with reservation of benefits rule” may apply if you continue living in the property.

As you are still living in the house, you are considered to be benefiting from it, even if you’ve passed ownership to your beneficiaries. Consequently, the gift is not a PET and won’t be IHT-free, even if you survive for seven years.

Similarly, if you gift a buy-to-let property to a beneficiary but you continue to receive rental income from it, the gifts with reservation of benefit rules apply.

There are ways to potentially circumvent this issue. For example, if you gift a home that you continue to live in, and pay rent to the new owner – your child – in line with market rates, the property will normally be considered a PET.

Where buy-to-let properties are concerned, your child would have to receive the rental income in order for the gift to a PET.

You may need to consider these rules as gifting may not always be a most tax-efficient way to pass your home to your loved ones.

Releasing equity from your home to pass to loved ones could leave your beneficiaries worse off

When you release equity from your home, you borrow against the property and your beneficiaries normally repay the debt during the probate process after selling the house.

The executor of your will must pay any debts owed by the estate before IHT is calculated. As a result, releasing equity from your home could reduce the size of your taxable estate, meaning your family pay less IHT.

You might decide to gift wealth from equity release to your loved ones, potentially allowing you to pass the value of your home to beneficiaries without IHT.

For instance, you might borrow £500,000 against your home and gift it to loved ones. If you survive for seven years after making the gifts, this wealth could become IHT-free.

Then, when you pass away, the £500,000 you borrowed is paid back from your estate, meaning that wealth is not considered part of your estate for tax purposes either.

However, depending on the details of the equity release agreement, your family could end up worse off overall. This is because you typically incur significant interest on the debt.

The total amount of interest could outweigh the IHT savings your family makes. As a result, opting for equity release could mean they inherit less than they otherwise would have done.

Get in touch

We can help you find the most tax-efficient way to pass your home to your loved ones.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

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.

Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.