The 12 best ways to avoid inheritance tax

12 ways to avoid inheritance tax

When 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 hands. In 2023/24 a record total of £7.5bn was paid in inheritance tax to HMRC, smashing the previous record of £7.1bn paid in 2022/23. It is predicted that the 2024/25 tax year will set a new record of around £7.7bn. This likely to increase further in 2027 after the Chancellor of the Exchequer announced, in the Autumn Budget, that from April 2027 defined contribution pensions will be liable to inheritance tax when the holder dies.

In this article I look at 12 ways to avoid inheritance tax and how to start inheritance tax planning. I also explain the inheritance tax changes that will impact pensions.

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 £215,000 according to 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 local, well rated financial adviser who will not only quantify the size of your potential inheritance tax bill, but will also tell you the steps you need to take to reduce it. Most important of all, there is no obligation on your part to do anything when you request a review. That's why I suggest that all readers take advantage of this free check while it's available and especially after the government's rule change in relation to pensions and inheritance tax.

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 the rules of intestacy 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 and 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 ideal 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 that level until at least April 2030. This is the amount an individual can pass on without inheritance tax being payable. Any unused nil-rate IHT band is transferable to a spouse or civil partner on death resulting in a total nil-rate band of up to £650,000 for married couples or those in a civil partnership.

In addition, there is Residence Nil-Rate Band (RNRB) that currently stands at £175,000 which can be applied against the deceased's property where it is inherited by a direct descendant. Direct descendants include children and grandchildren, but not brothers, sisters, nieces or nephews. The RNRB is applied against the value of the property within the deceased's estate before the standard inheritance tax nil-rate band is applied. The RNRB means that an individual could pass on up to £500,000 to their direct descendants without IHT, as long as the estate contained a property to be inherited by a direct descendant. Therefore it may be possible for people to avoid inheritance tax on property completely depending on the value of their home. The RNRB is in addition to the nil-rate IHT threshold and any unused RNRB can be inherited by a spouse. It means that a married couple or those in a civil partnership could potentially pass on up to £1million free of IHT to direct descendants. Bear in mind that the RNRB is reduced (tapered) by £1 for every £2 that an estate is worth over £2million. 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 of inheritance tax. These are known as potentially exempt gifts when you make them. If you die within 7 years then inheritance tax will be paid on a reducing scale, known as taper relief. The table below details the effective inheritance tax rate that is applied to the portion of any gift that is in excess of your IHT nil-rate band.

Time between date of death and when the gift was made	Inheritance tax rate
0-3 years	40%
3-4 years	32%
4-5 years	24%
5-6 years	16%
6-7 years	8%
7+ years	0%

You also have an annual IHT exemption which means that you can gift up to £3,000 each year, to whoever you want, completely free of IHT. You can also use any unused annual exemption from the previous tax year.

In addition, you can also gift £5,000 on the occasion of a child's wedding and gift £2,500 to a grandchild or a great grandchild that is getting married.

There is also a small gift exemption which means that you can gift up to £250 to anyone you wish, as long as you haven't gifted them money using one of the other exemptions.

Technically you can gift your home to your children and still live in it as long as you pay rent under a formal agreement. But, bear in mind, that the property will no longer be yours and your children will be liable to capital gains tax on any gain in the property value from the point that they acquire it. Also, the gift would be classed as a potentially exempt transfer (PET) and so would not be free from inheritance tax unless you survive more than 7 years from the date of the gift. 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. The main benefit of a trust is that you can gift into it but still maintain an element of control over the gift. Trusts require at least one trustee who is entrusted with administering and managing the trust for the benefit of the beneficiaries. There are different types of trust with the most commonly used being discretionary trusts and bare trusts. These trusts operate differently and are treated differently for IHT. Trusts are a complex yet effective tool in inheritance tax planning and I suggest that you seek professional advice if you are considering using them. In the first instance a FREE Inheritance Tax Check* will tell you whether the use of trusts is something that is appropriate for your circumstances and wishes.

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

It is possible to use trusts to gift savings and still receive a regular income from the money. Discounted gift trusts can be used to provide immediate IHT relief but it can be a complicated area of financial planning and, again, I suggest seeking professional advice. If you don't have a financial adviser you can trust then a good first step is to have a FREE Inheritance Tax Check*.

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. The cost of the insurance will depend on your age and health. 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. There is no limit to how much you can give away as long as the payments meet the qualifying criteria. 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. You can see the sort of information that the executors of your estate will have to provide in the event of your death via the HMRC IHT403 form.

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 gifts to a charity or a political party will be free of any IHT liability whether they are made during your lifetime or via your will. 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%. You also don't have to choose an existing charity, you can instead set up your own charitable trust.

10. Business Relief

It is currently possible to pass on shares in certain companies free from IHT. Business 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 and the rules were previously extended to include investments in AIM shares held for two years. However, following the Autumn Budget 2024 the rules are due to change.

From April 2026 the 100% rate of inheritance tax relief that business and agricultural property enjoy will only continue for the first £1 million of combined agricultural and business assets. This is designed to help protect family farms and businesses. However, beyond this, the relief will be set at 50%. This means that that beyond the first £1,000,000 exemption, inheritance tax will apply at a rate of 20%.

AIM shares will also be affected by a reduction in Business Property Relief (BPR). BPR will be reduced to 50% for all shares which are not listed on a recognised stock exchange, including AIM shares. This means that AIM shares will attract IHT at 20% from April 2026. This is a complex area of IHT planning and I suggest that you seek financial advice.

11. Spend it!

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.

12. Equity release

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?

Pensions

I have deliberately not included pensions in the above list because of the changes announced in the Autumn Budget in October 2024. While final salary pensions are technically liable to inheritance tax, defined contributions can currently be passed on free of inheritance tax.

As the rules currently stand, if you have a defined contribution pension and you die before age 75 the funds do not form part of your estate and can be inherited IHT free. If you die on or after age 75 your beneficiaries can inherit your pension pot without paying inheritance tax but any withdrawals will be liable to income tax at their highest marginal rate.

From April 2027 defined contribution pensions will be liable to inheritance tax when passed on after death. This means that inheritance tax will be applied in both of the instances described above. The proposed rule change therefore means that if you die after 75 then your beneficiaries could inherit your pension but would be liable to inheritance tax and income tax. However, the exception will be when spouses inherit a pension as no IHT will be liable in any instance. The proposed rule change is in a period of industry consultation before legislation is passed in 2025. So things could change.. However, defined contribution pensions are no longer attractive as an IHT planning tool.

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