How to avoid inheritance tax (IHT) in the UK

At a rate of 40%, inheritance tax could take a significant chunk out of the money you leave for your loved ones when you die.

Find out whether your family could be affected and learn about the different strategies you can employ to reduce your bill.

When is inheritance tax payable?

Before you start planning ways to avoid inheritance tax, it’s important to work out if you will need to pay it at all. Confusing rules may mean you’re worrying unnecessarily.

According to the latest figures from the government, less than 5% of estates paid inheritance tax in 2022/23.

Everyone has a tax-free allowance (referred to as the nil rate band), which means it’s possible to pass on an estate worth £325,000 before IHT will be payable. 

This is supplemented by the residence nil-rate band (RNRB) which provides a further allowance worth £175,000, if you’re passing your family home to direct descendants like your children or grandchildren (including adopted, step and foster children).

Here's a quick summary of the key thresholds and rates for inheritance tax:

Plus, if you are married, transfers between spouses are tax-free.

This means married couples and civil partners leaving a family home can pass on up to £1 million between them, before any IHT will be payable.

Unfortunately, however, more families will start to pay IHT in the future.

House prices have risen substantially in recent decades.

Tax-free allowances have also been frozen and, from April 2027, pensions will also be subject to the tax.

This means that by 2030/31 the Office for Budget Responsibility (OBR) has forecast that 9.3% of estates will pay the dreaded tax (roughly one in 11). 

Thankfully, though, there are many - legal -  ways to reduce the amount of IHT your family will pay.

How can I pay less inheritance tax?

There are many strategies to avoid paying inheritance tax or reduce the amount you pay.

Here’s a quick overview of your options.

1. Using your gift allowances

The IHT rules allow you to give some gifts completely free of IHT and put them outside your estate immediately for inheritance tax purposes.

You can make gifts of £3,000 in total a year out of your saved assets to one individual or several people, free of inheritance tax.

And you can also carry forward any allowance that you didn’t use from the previous year.

This means that if you’re married and didn't use your allowance last year, you could gift as much as £12,000 between you this tax year.

You’re also allowed to give away £250 each tax year to any number of people, as long as you haven’t used another allowance on the same person.

If you’ve got any weddings coming up, you can also give the happy couple a tax-free gift.

• £5,000 to your child

• £2,500 to your grandchild or great-grandchild

• £1,000 to anyone else

Finally, you can give away as much as you like out of your spare income, free of IHT.

However, you will need to demonstrate that the gifts were:

• Regular

• Made from surplus income (you can’t use capital from saving or investment accounts)

• Did not affect your standard of living (you’ll need to be able to show records of your income and expenditure)

It makes sense to get advice here, as the rules are complicated.

Strict record-keeping is a must to keep track of all these gifts.

2. Giving your money away early

You can also give money away during your lifetime that is not covered by gifting allowances.

But, for the gifts to be IHT free, you will need to survive a further seven years.

If you die within that time, the value of those gifts will be included in your estate.

As a result it’s best to plan these gifts while you are still healthy.

These gifts are referred to as potentially exempt transfers (PETs).

3. Life insurance

Whole of life insurance can also be an effective way to cover an IHT bill if you are in good health when you set it up.

This covers you for the remainder of your life, not a specific term like 10 or 20 years.

You take out cover and place it in trust, so the payout falls outside of your estate, and on your death, it’s available to pay any IHT bill.

The downside is that whole of life insurance can be expensive.

4. Giving money to charity

Gifts to charity are exempt from IHT and will immediately pass outside your estate, even if you die within seven years.

But altruism isn’t the only reason to leave money to a charity when you die. 

If you leave 10% of your net estate to charity, the rate of IHT that is paid on the rest of your estate will be reduced from 40% to 36%.

The rules are complex though, so it’s important to take advice first.

5. Move abroad

If you’re thinking about moving abroad, then leaving the UK may affect your IHT bill.

The rules for IHT are determined by your domicile status so make sure you take advice and understand the tax rules both in the UK and where you are moving. 

You’ll also need to be careful about visiting the UK or keeping property here, as HMRC may consider that you’re still resident or domiciled in the UK.

6. Making a tax-efficient will

Making a tax-efficient will is one of the best ways to save inheritance tax.

A specialist solicitor will be able to make sure you make use of all your available exemptions.

For example, it’s possible to lose your residence nil rate band if you leave assets to someone who is not a direct descendant.

What are the rules for IHT on pensions?

The rules for IHT on pensions are changing. Inherited pensions are currently free from IHT, but from 6 April 2027, unspent pension funds will form part of your estate when you die.

This means that you may have to pay IHT on your pensions, depending on the overall value of your estate when you die.

This is a significant change that could have a significant impact on the way you manage your money in retirement. 

As such, it’s important to take advice if you’re likely to be affected.

Get expert inheritance tax advice

Understanding the rules could help reduce your IHT bill and help you make the most of the available exemptions.

This is only a quickfire summary of potentially complex situations full of caveats, traps and pitfalls.

Therefore, if any of this might apply to you, you should seek specialist financial advice.

Unbiased can quickly connect you to a qualified local financial adviser who can look at your circumstances and figure out how you can reduce a potential inheritance tax bill.

If you found this article helpful, you might also find our article on inheritance tax business property relief informative.