The 10 best ways to avoid inheritance tax

6 min Read Published: 23 Jan 2024

10 ways to avoid inheritance tax

elderly coupleWhen you die you may want your estate to pass on to your children but having to pay inheritance tax (IHT) may reduce the amount of your estate that ends up in their pockets. In 2022/23 a record total of £7.1bn was paid in inheritance tax to HMRC, smashing the previous record of £6.05bn paid in 2021/22. It is predicted that the 2023/24 tax year will set a new record of around £7.6bn.

In this article I look at 10 ways you could prevent HMRC from getting its hands on your assets, before your children do, and start inheritance tax planning.

Before we start, it is worth knowing what your potential inheritance tax bill could be. This inheritance tax calculator will quickly work out what your potential IHT bill could be, in the worst-case scenario. The average IHT bill in the UK is £214,000 according the latest data from HMRC.

The information in this article provides an excellent guide to saving inheritance tax, including tips to cut your potential IHT bill. However when it comes to implementation, which actions are best for you and which will have the greatest impact on your IHT bill depends on your circumstances.

At the moment it is possible to request a FREE Inheritance Tax Check* with a tax professional that will not only quantify the size of your potential inheritance tax bill (but will tell you the exact steps you need to take to reduce your IHT bill. Most importantly of all, there is no obligation on your part to do anything when you request a review. That's why I strongly suggest that all readers take advantage of this free check while it's still available.

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How to avoid inheritance tax

1. Make a will

Making a will is a major part of estate planning as you can make sure that assets are distributed in line with your wishes. Without a will, your assets will be distributed according to intestacy rules and may be liable to inheritance tax (IHT) that could otherwise be avoided. If you don't have a will in place then this simple tool will quickly tell you how your estate will be divided up if you die. It is imperative to make a will if you are at all concerned about who inherits your assets but also if you want to reduce your potential IHT bill. Don't forget there is no inheritance tax paid on assets inherited between spouses.

There are a number of online companies which offer will writing services. Farewill* is the UK’s number 1 will writer as it allows you to answer a short series of questions before producing a will, checked by experts, which you simply print off and sign. It is perfect for those who have relatively straightforward affairs. If your affairs are complex (maybe you own a business) then Farewill offers a telephone callback* service whereby a will specialist provides guidance and support to produce a will over the phone. Money to the Masses has secured a 20% discount on online wills from Farewill and a 10% discount on wills completed over the phone.

Alternatively, check out our article that looks at the best online will writing services in the UK where we review other online will writing services including Make a will online*.

2. Make sure you keep below the inheritance tax threshold

The inheritance tax nil-rate band, also known as the inheritance tax threshold, for individuals is £325,000 and it will remain at least April 2028. This nil-rate IHT band is transferable to a spouse or civil partner on death resulting in a total nil-rate band of £650,000 for couples. In the 2015 Summer Budget a new 'main residence transferable allowance' was announced and currently stands at  £175,000 per person, which may allow people to avoid inheritance tax on property completely depending on the value of their home. This sum is in addition to the nil-rate IHT threshold. It means that a married couple or those in a civil partnership could potentially pass on up to £1million free of IHT. More information on the inheritance tax allowance on property can be found here.

3. Give your assets away

If you give assets away and you survive for at least 7 years then all gifts are free and avoid inheritance tax. If you die within 7 years then inheritance tax will be paid on a reducing scale, know as taper relief. You can also give gifts totalling £3,000 each year completely free of IHT. You can also gift £5,000 on the occasion of a child's wedding. I suggest that you download this excellent guide to saving inheritance tax which is one of the best guides I’ve found on the subject. Once you’ve downloaded it go to page 9 where you will see a complete list of exemptions you can claim to reduce your IHT bill. On page 17 you will also find an explanation on how you can now pass on your home to your family free of inheritance tax. It may also be worth checking out our article 'Do I have to pay inheritance tax on my parents house?'

4. Put assets into a trust

If you place assets within a trust they will not form part of your estate on death and avoid inheritance tax. You could place assets into a trust for the benefit of your children when they reach the age of 18 for example. Page12 of the guide mentioned above outlines how trusts can be used to save tax and keep control of your assets.

5. Put assets into a trust and still get the income

If you place assets into an 'interest in possession trust' you can still take income from the assets (which is liable to income tax) whilst avoiding inheritance tax on death.

6. Take out life insurance

You can cover any potential liability for IHT by taking out a life insurance policy for the potential inheritance tax bill and placing the policy in a trust to ensure it is paid outside of your estate. You can read a full explanation in our article "Life insurance and Inheritance Tax".

7. Make gifts out of excess income

You can make 'gifts out of income' free from IHT. For gifts to qualify they must form part of normal expenditure, be made out of income and not reduce your standard of living. If you plan to use this little-known method of reducing your IHT bill then make sure that you keep detailed records of your gifts and income.

8. Give away assets that are free from Capital Gains Tax

If you have assets that have fallen in value since purchase (property, shares etc.) they could be passed on without attracting Capital Gains Tax (CGT). Any recovery in the value of any assets would accrue in the estate of the recipient and any gain would be free from a potential IHT liability after 7 years.

9. Leave something to charity

Anything left to a charity will be free of any IHT liability. If you leave at least 10% of your total assets to charity then the inheritance tax rate on the remaining assets will be reduced from 40% to 36%.

10. Business Property Relief

If is possible to pass on shares in certain companies free from IHT. Business Property Relief can allow businesses to be passed on with up to 100% IHT relief. It is primarily aimed at enabling family-owned businesses to be passed on, and carry on, without having to pay IHT. There are certain qualifying criteria but the rules have since been extended since the relief was originally introduced to include investments in AIM shares held for two years. However, this is a complex area of IHT planning and I suggest that you seek financial advice.

Bonus: Spend it!

Here is a bonus way to reduce your IHT bill in addition to the 10 ways listed above. There is little point in living on a tight budget as you grow older and then your beneficiaries get taxed at 40% on some of your assets. If you have worked hard to build up your assets then you should enjoy them to their utmost, maybe a new car or a holiday of a lifetime in retirement.

and finally...

If all of your wealth is tied up in property, you could consider an equity release scheme such as a lifetime mortgage or home revision scheme. Depending on which option you choose, you will either borrow money against the value of your home or sell part of your home at a reduced market rate while continuing to live in the property.

The process works by reducing the assets you own and in turn increases the debts that count against your estate. The money you receive can be passed onto your future beneficiaries or, of course, you can spend it yourself. As explained in tip number 3 above, you'll need to survive the gift by 7 years to ensure there is no inheritance tax to pay. You can read more in our article What is equity release and how does it work?



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