9 ways to avoid inheritance tax

Rising property prices means more families are drawn into the inheritance tax net. But with careful planning, you can reduce the portion of your estate that is lost in tax – or even avoid inheritance tax altogether. This guide shows you the popular and fully legitimate methods for reducing tax and maximising your loved ones’ inheritance.

Angela Kerr Director, Editor

When you die, if your estate is above a certain threshold, inheritance tax may be charged. But there are steps you can take to reduce the amount of inheritance tax that’s charged and you may be able to avoid inheritance tax altogether.

When it comes to how to avoid inheritance tax, here are some popular options.

1. Make gifts

You can gradually reduce the size of your taxable estate by making gifts during your lifetime. The rules surrounding these are complex, however, and not all gifts will reduce inheritance tax in all circumstances.

You can gift up to £3,000 in a single tax year, and carry forward unused exemptions from the previous year. This means you can gift up to £6,000 (or £12,000 as a married couple) every two years and your beneficiaries won’t have to pay inheritance tax on it.

Wedding gifts also carry inheritance tax exemptions: parents can give £5,000, grandparents £2,500 and anyone else up to £1,000. You can also make smaller gifts (worth up to £250) to any individual. You can do this for as many individuals as you like – but only one per person.

Larger gifts are classed as potential exempt transfers (PETs). If you die seven or more years after making them, then no inheritance tax is payable. However, if you die sooner, inheritance tax may be payable (the amount can be reduced if you die between 3 and 7 years after making the gift). Keep records of your gifts to save your family from disputes later on.

For advice on inheritance tax planning, our partners at Unbiased can match you with the right financial adviser for your needs

2. Leave your estate to your spouse or civil partner

In the 2023/2024 tax year, everyone has a tax-free inheritance tax allowance of £325,000 – this is known as the nil-rate band. So if your estate is below £325,000, it sits in your “nil-rate band” and no tax is payable. But if it’s above £325,000, everything above that threshold is subject to inheritance tax rate of 40%.

However, there is no inheritance tax payable in the UK when inheriting from a dead spouse or civil partner.

Also, if your spouse dies, you also inherit their unused nil-rate band. This means the surviving spouse’s inheritance tax allowance could double to £650,000.

However, if the partner who dies first has already bequeathed some assets (such as to children from a previous marriage), then that value will be deducted from the nil-rate band is passed on. Also note that you pass on a percentage of your nil-rate band, rather than an amount.

3. Giving to charity

If you’re looking at how to avoid inheritance tax, gifts to charities and political parties can be free from inheritance tax. Furthermore, if you leave at least 10% of your assets in your will to charity, you can reduce the rate of inheritance tax on everything else to 36%. So, it could pay to be generous!

4. Passing your home to your child or grandchild

When it comes to how to avoid inheritance tax on property in the UK, if you are bequeathing your home to your children or grandchildren (including adopted, fostered and step-children), then there is more protection from inheritance tax in the form of the ‘main residence nil-rate band’. This is currently £175,000 per person and applies if your estate is worth less than £2 million.

This means someone dying in 2023 could pass on assets worth up to £500,000 tax-free, if this included their residence passing to their descendants. Furthermore (because this band too is transferable), it means a couple could pass on up to £1 million if the same conditions were met.

Remember that only direct descendants qualify for the main residence nil-rate band. Other relatives (e.g. nieces and nephews) or friends do not. Also, if you own more than one property, your estate’s executor can decide which property to use against the residence nil-band rate allowance.

See our guide to Inheritance tax on property for more advice on how to avoid inheritance tax on property.

For more advice on inheritance tax, find a financial/ tax adviser through our partners at Unbiased.

5. Taking out a retirement interest-only mortgage

If you have a large estate, you may be able to avoid inheritance tax by taking out a ‘retirement interest-only mortgage‘ to pass on some early inheritance to family members. These mortgages involve releasing equity from of your house and paying the interest on the loan each month. The capital doesn’t need to be repaid until you die or go into long-term care.

By reducing the size of your estate in advance it also means there may be a smaller inheritance tax bill when you die, and you may be able to avoid inheritance tax completely, although this will depend on your circumstances and we advise you should consult an independent financial adviser.

6. Use your pension

Most pension pots are entirely tax free if you die before the age of 75. If you die later, they are taxed at your beneficiaries’ marginal rate, which for most people is only 20 per cent. This means it makes sense to live off other assets (if you can) for as long as possible, and save your inheritance tax-proof pension for last. However, you should not try to use your pension to deliberately shelter assets from inheritance tax. HMRC are strict with those it perceives to be abusing the system.

7. Avoid inheritance tax by using trusts

You can put assets into a trust for someone, to take them outside your estate and so reduce the inheritance payable on them or avoid inheritance tax completely. The rules surrounding trusts are very complex, however, so you should consult an independent financial adviser first.

8. Spend it!

If you’re looking at ways to avoid inheritance tax, then the chances are you have a fairly sizeable estate to pass on. While it’s understandable that you want to look after your children and grandchildren, you have worked hard to build up your assets so you should enjoy the benefit in your retirement.

9. Make a will

When we’re looking at how to avoid inheritance tax, making a will is vital. It’s one of the simplest and easiest ways to make sure your money goes to the people you want, for the reasons you choose. Making a will also allows you to choose how your assets will be managed when you die, letting you plan for and reduce your inheritance tax bill.

When do I pay inheritance tax?

We’ve looked at how to avoid inheritance tax, but what happens if you still need to pay it? Inheritance tax must be paid within 6 months of the person’s death and is usually arranged by the executor. This is not long and catches many people out. Probate (the process of sorting out a persons estate after their death) usually takes at least this long and often longer. The assets may not even be released from the estate by the time the tax falls due. Furthermore, if the main asset is a property (as it usually is), then this may have to be sold to pay the tax. Property sales, alone, can take many months.

HMRC will start charging interest once the six months is up. One option is to pay a portion of the tax within that time, even if the estate hasn’t been fully valued. See Life insurance below for another solution to this problem.

For more information on the probate process and when and how inheritance tax is paid see our guide Probate Explained.

Avoid inheritance tax fees with life insurance

Life insurance can be a way to reduce the impact on your beneficiaries when the inheritance tax bill comes. It is particularly useful if the tax needs to be paid before your estate can be distributed. You can take out a life insurance policy specifically designed to pay the inheritance tax bill. So that your beneficiaries can avoid inheritance tax fees having to be paid in a hurry.

The policy must be set up to pay into a trust. Otherwise, the payment itself will form part of your estate, and be subject to inheritance tax! Again, this is an area you need to discuss with an independent financial adviser.

For more advice on inheritance tax, find a financial/ tax adviser through our partners at Unbiased. With more than 27,000 regulated advisers on their platform, they can match you with the right adviser for your needs.

Frequently asked questions