5 Ways to Reduce Inheritance Tax

Are you wondering how Inheritance Tax (IHT) may affect your assets and the money that you leave to your family in the future? As with many other areas of tax, there are ways in which you can minimise IHT.

In this article, we explain what Inheritance Tax is and shares 5 ways that you can reduce your Inheritance Tax bill.

What is Inheritance Tax and how can it affect you?

Inheritance Tax (IHT) may affect individuals when their estate is above a certain value on death or if they make certain gifts during their lifetime above a certain value. 

Each individual has a nil-rate band, which is your exempt amount for Inheritance Tax. This is currently £325,000 per person. The nil-rate band can be transferred between spouses, so a total nil-rate band of £650,000 could be available on second death. It’s important to consider that assets passed between spouses are exempt from IHT. 

One potential issue with the nil-rate band is that it has been frozen for many years now, but over those years we’ve had a significant rise in asset prices, leading to more individuals being liable to IHT.

A further nil-rate band is also available in relation to your main residence. As long as you leave your main residence to your direct family, whether that be your children or grandchildren, a further exemption can be claimed. The current Residence Nil-Rate band is £175,000 per person, subject to the value of your home, if lower in value.

It’s important to be aware that the Residence Nil-Rate band could be reduced if your estate value exceeds £2 million. The Residence Nil-Rate band is a complex subject and we would suggest that you seek professional advice to assess your position towards this. 

If your assets exceed your available nil-rate bands, then IHT is applied at a rate of 40%.

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5 ways to reduce your Inheritance Tax

There are several options that you can consider to help mitigate an IHT liability. Five of these, that are beneficial ways to reduce IHT are highlighted below:


Although it sounds a bit strange coming from a financial adviser, spending is a simple way for you to reduce the value of your estate. It’s important to consider when spending, to spend on something that’s not a tangible asset. For example, go on a nice holiday. If you were to buy an expensive car, that’s still going to be an asset in your estate. You need to be mindful about what you’re spending, making sure it’s within your means, and making sure you’ve still got enough to last the remainder of your lifetime.


Gifting is another option to consider, allowing you to gift assets or money directly to your beneficiaries and also allowing you to see them enjoy the benefit of these gifts.

There are a number of exemptions that you can consider when gifting that allow you to reduce your Inheritance Tax liabilities:

  • The annual exemption, which allows you to gift up to £3,000 in total per tax year.
  • The Small Gift exemption allows you to give up to £250 per person, per year.
  • Gifts in respect of marriage. We can gift up to £5,000, to children, up to £2,500 to grandchildren and up to £1,000 to other beneficiaries in respect of marriage. 

Gifts made to charities are also exempt, either during your lifetime or through your will. 

If you make any gifts that exceed your exemptions, these are regarded as Potentially Exempt Transfers and this means that you need to survive a period of seven years from making the gift for it to be regarded as fully out with your estate, for Inheritance Tax purposes.

Using trusts

A direct gift can be made into trust, allowing you to remove money/assets from your estate. Providing you survive seven years from the date of the gift, it will be exempt from Inheritance Tax. 

A common use of trusts is gifting money to children or grandchildren for them to benefit from that money in the future. When we gift money into trust, we will place it in an appropriate investment so the money can still grow. The advantage, initially, is that any growth received within the trust investment will be out with your estate. 

There are various types of trusts available and different options as to how money can be accessed in the future, from a trust.

As arranging a trust is a complex area, we would recommend you seek professional advice on this.

Investments that qualify for Inheritance Tax relief

Another solution available is investments that qualify for an exemption called Business Relief. Providing these investments are held for two years and at the date of death, Inheritance Tax will not apply to them. 

One of the benefits of these investments is that they are still your own investments, allowing you to retain control and access to the money. However, these investments do come with higher risks and wouldn’t be appropriate for all individuals. Again, professional advice will be needed on the subject to assess the suitability of these types of investments.

Life assurance policies

The final solution we can consider is arranging a Whole-of-Life assurance policy, held in a trust. This option will provide a capital sum on death to cover a potential IHT liability. The benefit of this being that your beneficiaries wouldn’t need to sell your other assets to pay the IHT bill.

Arranging a life assurance policy isn’t going to reduce your Inheritance Tax bill, however, it will just provide a means to pay that tax liability.

In conclusion

This article has provided an overview of Inheritance Tax and the potential considerations to mitigate any liability that may apply to your assets.  As you can see, it is a complex subject and there is a need for professional financial advice.

If this is an area of concern for you, please complete the contact form below and we will get back to you soon.