5 Ways to Reduce Inheritance Tax

Are you wondering how Inheritance Tax 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 video, Jonathan McDowall from Henderson Loggie Financial Planning explains what Inheritance Tax is and shares 5 ways that you can reduce your Inheritance Tax bill.

Covered in this video:

✅ What is IHT and how can it affect you?
✅ How spending can help reduce your IHT liability
✅ Gifting
✅ Using trusts
✅ Investments that qualify for IHT relief
✅ Life assurance policies

📌 If you have any questions, please drop them into the comments section below 👇 or contact Jonathan directly at jonathan.mcdowall@hlfp.co.uk

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, which could potentially be an issue, 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 property to your direct family, whether that be your children or grandchildren, a further exemption can be claimed. The current main residence nil-rate band is £150,000 per person and this will rise to £175,000 from April 2020.

It’s important to be aware that the main residence nil-rate band could be reduced if your estate value exceeds two million pounds. The main residence nil-rate band is a complex area and I 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%, so a significant tax can be applied.

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 assets/estate and resulting Inheritance Tax liability. It’s important to consider when spending, to spend on something that’s not a tangible asset. For example, go on a nice holiday, but 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 that I’d always recommend 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’s a number of exemptions that you can consider when gifting that allow you to reduce your Inheritance Tax liabilities. Firstly, we have an annual exemption, which allows you to gift up to £3,000 in total per tax year. We also have the Small Gift exemption allowing you to give up to £250 per person, per year. In addition to this, we can make 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

Trusts allow you to make a direct gift into trust, allowing you to remove money/assets from your estate. Providing you survive seven years from the date of the gift, it would 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 place money in trusts, we will place it in an appropriate investment so the money can still grow. The advantage of this is that any growth received would be out with your estate once placed in the trust. 

There are various types of trusts available and different options as to how money can be accessed in the future, from the trust. However, as this is a complex area, I would recommend you seek professional advice if you would like to discuss this further.

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, they would be exempt from Inheritance Tax. 

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

Life assurance policies

The final solution we could consider is arranging a Whole-of-Life assurance policy, held in a trust. This option will provide a capital sum on death that would cover the potential IHT liability. The potential 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

Hopefully, this article has provided a good overview of Inheritance Tax and the potential considerations as to how you can mitigate any liability that may exist. However, as you can see, it is a complex subject and there is a need for professional financial advice. So if this is an area of concern for you, please feel free to get in touch with Jonathan directly (jonathan.mcdowall@hlfp.co.uk) or complete the contact form below.