Seven Smart Strategies to Minimise Your Inheritance Tax Bill
A short, thoughtful read to help you feel more prepared and informed. Reading time approximately 3 minutes.
Inheritance tax (IHT) is often dubbed Britain's most loathed tax, and it's no surprise why. With HM Revenue & Customs collecting a staggering £7.5 billion in IHT for the financial year ending March 2024 (a £400 million increase from the previous year), more families are feeling the pinch. Soaring property prices have pushed many estates over the tax threshold, with projections suggesting IHT receipts could hit £9.5 billion by decade's end. But don't despair, there are effective ways to reduce or even eliminate your IHT liability. Here's how you can keep more of your wealth for your loved ones.
1. Pass Assets to Your Spouse or Civil Partner
One of the simplest ways to sidestep IHT is to transfer assets to your spouse or civil partner. The tax rules allow unlimited asset transfers between spouses without incurring IHT. Plus, since 2007, the surviving spouse can inherit their partner's unused nil-rate band, potentially boosting their tax-free allowance to £650,000, or even £1 million if they own a home together. Just remember to claim the unused allowance within two years of the surviving spouse's death to avoid an unexpected tax bill.
2. Leave Your Home to Your Children
Rising property values are a key driver behind surging IHT revenues, but homeowners have a valuable tool: the residence nil-rate band. This allows you to pass on an additional £175,000 tax-free when leaving your main property to your children or grandchildren. Couples can combine this for a total allowance of £1 million. Be aware, though, that the property must be your residence, and the relief tapers off for estates worth over £2 million. Even if you've downsized, you may still qualify for relief if you sold a more valuable home after July 7, 2015.
3. Gift Money During Your Lifetime
Gifting is a straightforward way to shrink your taxable estate. You can give away £3,000 annually without IHT consequences, and this exemption can be carried forward one year, allowing a £6,000 gift if unused previously. Small gifts of up to £250 per person per year are also tax-free, as are regular gifts from surplus income, provided they don't affect your lifestyle. Keep meticulous records of these gifts, as HMRC may request evidence after your passing.
4. Understand the Seven-Year Rule
For larger gifts exceeding your annual exemptions, the seven-year rule comes into play. These "potentially exempt transfers" (PETs) become IHT-free if you survive seven years after making them. If you pass away within three years, the gift is taxed at 40%; after that, taper relief reduces the rate. With £221 million charged on PETs in 2021-22, planning early is key to avoiding this trap.
5. Use Life Insurance to Cover IHT
If IHT is unavoidable, a life insurance policy can cover the bill, sparing your beneficiaries the cost. Ensure the policy is placed in a trust to keep the payout out of your estate, as otherwise, it could increase your IHT liability. Note that premiums can be costly, especially as you age, so weigh the costs carefully.
6. Leverage Your Pension (While You Can)
Currently, pensions are a tax-efficient way to pass on wealth, as they're exempt from IHT. You can pass your entire pension pot to beneficiaries tax-free, saving up to 40% in tax. However, Labour's 2024 Budget announced that pensions will fall under IHT from 2027, so act now if you plan to use this strategy. Beneficiaries may face income tax on withdrawals if you die after age 75.
7. Set Up a Trust
Trusts are a powerful tool to reduce IHT by removing assets from your estate. While setting up a trust may involve an initial tax charge, it can save significant amounts down the line. The effectiveness depends on the trust's structure, so consult a professional to navigate the complexities.
Plan Ahead with Know When I Go
With the UK's ageing population (projected to include 14 million people over 65 by 2026), planning for IHT is more critical than ever. The Know When I Go app offers an intuitive way to organise your personal information, ensuring your wishes are clear and actionable upon your passing. Visit Know When I Go today to streamline your life admin and secure your legacy with ease.
Important Disclaimer: The figures, rates, and thresholds quoted are correct as at December 2025. Inheritance Tax law and rules can change frequently. This information is for general guidance only and does not constitute financial, legal, or tax advice.