What is Inheritance Tax?
Inheritance tax (IHT) is a state tax charged on assets inherited from a deceased person. Inheritance tax is paid by the person who inherits the assets, and rates vary depending on the size of the inheritance and the inheritor's relationship to the deceased.
We will discuss our top 6 practical ways how you can avoid inheritance tax. Before we get into our tips, we invite you to watch the following video from our CEO and IFA, Dominic James Murray, in which he discusses the best way to avoid UK IHT. If you are interested in more straightforward explanations on pensions and retirement planning, visit our YouTube channel.
Inheritance Tax Threshold
Inheritance tax is a 40% tax levied on estates worth more than £325,000. This may increase if a home or the sale proceeds of a home are included. The first £325,000 of each estate is exempt as part of the “nil rate band”. This is transferable between partners if it goes unused, meaning a married couple could pass on £650,000 without paying tax.
Furthermore, additional exemptions for passing down family homes were introduced in 2017 to help reduce the inheritance tax burden. These changes mean that individuals who inherit a family property are less likely to be forced to sell it to cover tax liabilities. By the 2019–2020 tax year, an extra residence nil-rate band of £150,000 was available, increasing the total tax-free threshold for married couples or civil partners to up to £800,000, depending on the value and structure of the estate.
How To Avoid Inheritance Tax?
No one wants to see a significant portion of their hard-earned assets lost to inheritance tax. This is especially true when those assets are being passed on to or from loved ones. Fortunately, there are several strategies available if you're looking to understand how to avoid inheritance tax in the UK.
Whether you’re planning to leave property, savings, or investments to your family, taking the right steps now can significantly reduce the tax burden on your estate. From making use of tax-free allowances to setting up trusts and gifting assets, proactive estate planning can ensure more of your wealth goes to the people you care about.
Below, we’ve outlined six practical tips that can help reduce or even eliminate your inheritance tax liability. Each strategy is designed to protect your legacy while making the most of the current tax rules.
1. Talk to An Independent Financial Adviser
If you are unsure about how to manage your money, invest for the future, or care for your family, a financial adviser is worth the investment. Financial advice is beneficial at various stages of your life. Such as as when you have a child, get a promotion, or inherit money. A financial adviser can help you choose the best option for your needs and help you manage your income to avoid unnecessary tax bills and running out of money.
2. Give Your Assets to a Family Member
One effective way to reduce inheritance tax is by making use of lifetime gifting.
You can give up to £3,000/person per tax year free from inheritance tax in the 2025–26 UK tax year. If you didn’t use this allowance in the previous tax year, you’re allowed to carry it forward for one year. This means you could gift up to £6,000 tax-free in total.
On top of that, you can give small gifts of up to £250 per person to as many people as you like in a tax year, provided no other exemption is used for the same recipient.
You may also make regular gifts from surplus income (known as “normal expenditure out of income”) without it counting toward your estate liability, if such gifts don’t affect your standard of living and are well documented. There’s no fixed limit on these, making them a powerful tool when planning how to avoid inheritance tax.
3. Set Up A Trust
Pensions and life insurance policies can help you reduce your tax bill. The policies may need to be written “in trust” with either of these. This typically means that any payouts will not be included in your estate, but will instead be distributed to your beneficiaries without being subject to inheritance tax.
If you place assets in a trust, they will not be included in your estate when you die, thereby avoiding inheritance tax. You could, however, place assets in a trust for your children's benefit when they reach the age of 18.
4. Make a Donation at Your Will
Another way to avoid estate tax is to use a trust to transfer some of your wealth to a charity. Charitable trusts are classified into two types: charitable lead trusts and charitable remainder trusts.
If you have a charitable trust, some of your trust's assets will be donated to a tax-exempt charity. Donating to charity reduces the value of your estate and provides an additional tax break. Whatever remains in the trust after your death will be distributed to your beneficiaries.
You can transfer stock or another appreciating asset to an irrevocable trust if you have a charitable trust. You can profit from that asset throughout your life. When you die, your investment income will be donated to charity. You'll avoid capital gains tax and reduce your estate tax burden in the process.
5. Establish a Family Business
If you want your children to inherit any family-owned businesses or assets, such as real estate, you can set up a family-limited partnership. In most cases, this entails forming a general partnership and then making heirs and family members limited partners.
You'll still be able to make decisions as the general partner. Your partners, on the other hand, will own a stake in your company or a portion of your assets. As a result, your estate will be smaller in size.
6. Leave Your Property to Your Children
The government introduced an additional tax allowance on top of the nil rate band in April 2017. This provides homeowners with an additional £175,000 tax allowance if they leave their home to their children, stepchildren, grandchildren, spouses, or civil partners.
It's important to understand this extra tax allowance before writing a will, just like the nil rate band, because it may influence who you leave your estate to. This allowance is also transferable between married partners and couples in civil partnerships, which can increase the surviving partner's tax allowance.
Secure Your Legacy with Expert Financial Advice
Navigating inheritance tax can be complex, especially when your assets include property, pensions, and family-owned businesses. As we've outlined, there are several strategic and legal ways to reduce your inheritance tax bill — but applying them correctly requires careful planning and professional insight.
Whether you’re considering gifting assets, creating a trust, or updating your will, the smartest move is to consult with an independent financial adviser who understands the full landscape of UK tax laws and estate planning.
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