How can I avoid inheritance tax?

First published 07 February 2014 • Updated 08 August 2017

It’s easy to focus on what to spend your money on here and now, but not so easy to invest it for your future spending. And it’s even less easy to make plans for what will happen when you die.


That’s what estate planning is about. And it’s an important area since the numbers involved can be pretty big. Saving a five-figure sum in inheritance tax (and thereby passing it to family instead) is not unusual.

So, what do you need to do? The starting point is a fairly straightforward calculation of the likely value of your estate.

Firstly, add up your main assets…

Your house is normally the largest asset, but if it’s owned jointly – with a spouse for example – then the issue of inheritance tax is likely only to arise after the second death, although planning ahead is best. Other assets might include savings and investments. And life assurance policies would need to be considered if they are not written in trust (which is generally the best way).

Secondly, subtract any liabilities…

Most people don’t expect to have an ordinary mortgage when they die, but there might be another loan which needs paying off, including perhaps an equity release plan.

Thirdly, subtract the “nil-rate band”…

That’s the allowance which each person has. As a starting point it is £325,000 (fixed at that level until 2018). But things can get a little complicated here since if a spouse who died first did not fully use their allowance then it can be passed on. In the best case, you would end up with an allowance of £650,000.

Finally, calculate the potential inheritance tax bill…

That will be 40 per cent of that final value would be payable as tax.

So what can you do if it looks like your family will have a large bill?

Various approaches are possible, including:

  • Spend it! Although that can be easier said than done for older people
  • Gift it! Make gifts to beneficiaries during your lifetime – you will probably want to leave yourself with enough to pay for later life care. Gifts take seven years to be removed from the calculation, so don’t leave it too late
  • Use your allowances. These include small gifts, and gifts out of income allowances
  • Put assets into trust. Technically this is a gift which takes seven years to have an effect, but some types of trust reduce the value of your estate more quickly or have other advantages
  • Know your tax. By investing in inheritance tax-friendly ways, some products will ensure that your investment is outside your estate after two years
  • Just pay it. Alternatively, simply make plans to pay the tax – you could just accept the inevitable but have a life assurance policy to ensure that your beneficiaries have enough to pay the bill

What won’t work, though, is giving your house to the family while still living in it. It is still treated as yours for the inheritance tax calculation.

All in all, it’s worth considering the best approach in plenty of time, as well as ensuring that your will is up to date. Apart from that, it’s good to know that if the worst should happen, you have done everything you can.


About the author

Peter Lawrence is an independent financial adviser and Principal of Prime Time Financial. Peter’s passion is to help people get the most out of life by making full use of what they have, and that certainly includes their finances.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of

About the author
Nick Green
Nick Green
Nick Green is a financial journalist writing for, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.