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How can I reduce my inheritance tax liability in the UK?

Woman sitting at her computer and asking herself, "How can I reduce my Inheritance Tax liability" in the UK

How can I reduce my inheritance tax liability in the UK? It’s a good question, but before you read the suggestions below, we suggest you read the main article, What is Inheritance Tax in the UK?

If you’ve already read it, you’ll know that the rate of inheritance tax is 40% but also that it’s not taxed on the whole of your estate. Indeed, most families aren’t subject to inheritance tax at all.

But what if your estate is subject to inheritance tax now? Or else you think the value of your assets may grow in the future? If so, there are steps you can take now that could help you avoid some or all of it, including:

  1. Gifts in your lifetime
  2. Make the right Will
  3. Use investments
  4. Insurance policy

1. Gifts in lifetime

The basic principle is this: give something away and it won’t be considered part of your estate after 7 years. Imagine your executor completing the inheritance tax form after you’ve passed away (the form is called IHT403). The very first section is entitled “Gifts made within the 7 years before death” and the form goes on to ask for further details.

So in other words, if you gave something away – whether it’s money or a physical asset – and you died more than 7 years later, your executors won’t need to put it on the form. It is considered outside of your estate for inheritance tax.

If you do happen to die within 7 years, the amount of tax you pay may be reduced. The tax rate on the gift reduces on a sliding scale after 3 years. This is called “taper relief”.

Besides these kinds of gifts, known as “potentially exempt transfers” (PETs for short), there are two other kinds of gifts: annual exemptions and chargeable lifetime transfers (CLTs).

The annual exemptions allow you to give away certain amounts for free every year.

These exemptions include £3,000 that you can give away every year. Separate to the annual £3,000 amount are “small gifts” of up to £250. You can give as many of these as you like, but the £250 won’t be exempt if it’s given to the same recipient as the £3,000 gift.

Then there are wedding allowances of up to £5,000 you can give a child. There are lesser exemptions if you’re a grandparent, great grandparent or friend of the happy couple.

And finally, there are gifts out of regular income. Give away as much as you like out of your regular income and it will be free of inheritance tax. However, there are a few strings attached to this tax relief, not least that it should not affect your standard of living.

The other type of “gift” is a CLT, or chargeable lifetime transfer. This is when you put money into a trust – specifically the kind that falls under the “relevant property regime”. If you put in more than £325,000 (that is the current limit), there is an immediate tax charge. And you also have to survive for 7 years for the money to be inheritance tax-free. (There are other tax rules applying to trusts that are too complex to mention here).

2. The right Will

The right Will helps you maximise your allowances and exemptions. For example, if you are married or in a civil partnership, anything passing to them is exempt from inheritance tax. Similarly, if you own a property, you can ensure that it passes to children. This means your estate qualifies for an additional inheritance tax allowance called the Residence Nil Rate Band or RNRB, worth up to £175,000.

Any gifts you leave to charities are also exempt from inheritance tax. And there are a handful of other exemptions besides, such as gifts to political parties.

Leave more than 10% of your estate to charity and your estate benefits from a reduced rate of inheritance tax (36% instead of 40%). By doing this, you can benefit charities and leave more to your chosen beneficiaries by paying less inheritance tax.

3. Invest wisely

If you have a pension, there’s good news. You’re probably not going to have to pay IHt on it. According to

“You do not usually pay Inheritance Tax on a lump sum because payment is usually ‘discretionary’ – this means the pension provider can choose whether to pay it to you.”

Ask the pension provider if payment of the lump sum was discretionary. If it was not, you may have to pay Inheritance Tax.

There are ways to ensure that Pensions are generally exempt from inheritance tax by virtue of being held in trust. So anything you save in a pension does not add to the value of your estate. This makes saving in pensions a good way of avoiding inheritance tax, although if your spouse or partner inherits the pension (or a death-benefit payout), it would form part of their estate when they die.

Other investments get money out of your estate after a fixed number of years. Why are these investments – some get your investments free of IHT after just two years, which is a lot quicker than the usual 7. You will see some of them advertised as AIM or EIS investments.

So what’s the catch? Well, the reason for their IHT friendliness is because the Government is trying to encourage investment in companies to boost the economy. The money you put in is invested in early-stage or growing companies. And these are exactly the kind of companies that could take off and grow rapidly or else struggle and potentially fail.

Because of that, these may be considered riskier than other kinds of investments, so taking advice from a financial adviser is a must. Your adviser will be able to give you information about these types of investments and help you weigh up the risk.

4. Insurance policy

If you think your estate is likely to pay inheritance tax, you can take out an insurance policy. Specifically, a “whole of life” insurance policy that pays off the entire inheritance tax bill. Such policies can be expensive, but still a lot less than the inheritance tax bill.

It’s advisable to get policies “written in trust”. That way, you can avoid the payout going into your estate, where it would be counted for inheritance tax.


The question, “How can I reduce my inheritance tax liability in the UK?” has a simple answer. Inheritance can often be avoided altogether, or at least mitigated, as long as you plan ahead. In my experience, many people just aren’t aware of the simple, perfectly legal things you can do. These include having the right Will or making gifts 7 years before you die. If you have a lot of savings, inheritance tax-friendly investments are worth considering, or a particular kind of life insurance policy could wipe out the bill altogether.

The information contained in these articles is for general interest purposes only. We take every precaution to ensure that the information is correct at the time of publishing but errors can occur. Given the changing nature of laws, rules and regulations, there may be omissions or inaccuracies in the information. Bristol Wills & Estate Planning Ltd is not responsible for any errors or omissions or for any results obtained from the use of this information. You should never rely on the information in these articles as a substitute for professional legal advice, whether from Bristol Wills & Estate Planning or any other legal service or professional.

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