How can I reduce my inheritance tax bill? - Times Money Mentor (2024)

The amount that the government will take from families in inheritance tax this tax year is set to beat last year’s record figure. If your estate is likely to breach the inheritance tax threshold, we outline ways to cut the bill.

Inheritance tax is Britain’s most hated tax, so the news that the government is considering ditching it may be music to your ears. However, less than 5% of estates actually pay it.

Nonetheless, a record £7.5 billion in inheritance tax was collected by HMRC in the last tax year – an amount that expected to be surpassed this year. In April 2024, for example, £85million more was collected than in April 2024, according to government data.

Rising property prices and the freezing of the thresholds at which you start paying the tax until 2028 are being blamed.

So what can you do to ensure more of your wealth is passed on to your loved ones?

In this article we explain:

• What are the UK inheritance tax thresholds?
• Can I give my money away?
• Should I pay more into my pension?
• What are trust and how can they reduce IHT?
• What are some of the other methods to reduce IHT?

Read more: How does inheritance tax on gifts work in the UK?

What is inheritance tax?

Inheritance tax (IHT) is the money paid to HMRC on your death, depending on the value of the estate that you leave behind.

Your estate is basically all the assets that belong to you including your money, property, businesses, investments, as well as things like your art collection or cars.

The government sets is a threshold, below which no IHT needs to be paid. It is currently £325,000, frozen until 2028.

There is also an extra allowance if you leave your home to your children or grandchildren called the residence nil-rate band. This has also been frozen until 2028 at £175,000.

Above these amounts and IHT is usually levied at 40%.

For more details about the tax-free thresholds, check out our article Inheritance tax: what are the thresholds and rates?

How to reduce inheritance tax

The best way to reduce your IHT bill for your loved ones is to start planning now.

The sooner you put things in place the easier it will be to put the right things in place for your family when you are gone.

Here are some ways to reduce your IHT bill.

1. Write a will

The first thing to do is to make a will. If you don’t state how you want your assets to be divided, the law decides for you. That means that even more than necessary could end up going to the taxman.

You might also want to appoint a lawyer to help you draft your will, especially if your financial or family situation is complex.

If you leave at least 10% of your estate to charity, your family will pay a reduced rate of inheritance tax.

2. Seek financial advice

At this stage you may want to seek out a financial adviser or tax adviser who works specifically in this area.

Make sure you find an adviser who is regulated by the Financial Conduct Authority.

If you are wanting to know about how much you can expect to pay for financial advice so you can work out if it is worth it for you, then check out our article.

3. Spend your money

The simplest way to reduce or avoid inheritance tax altogether is to try to get your taxable estate under the threshold.

This means you could spend money on yourself while you’re still alive, so why not go on that holiday of a lifetime?

Or you could gift some cash or assets to family and friends, though there are rules around this (read number four).

4. Gifts and inheritance tax

We can all give away up to £3,000 each tax year without it being added to the value of your estate. You can choose to give the full £3000 to one person or split it between a number of people.

You can also roll the £3,000 annual allowance over, so if you didn’t use it last year, you can give away cash or assets worth £6,000 this tax year. But it only lasts for one year.

There are other gifts you can give too, such as £5,000 towards a child’s marriage or £2,500 for a grandchild’s.

You can give away more than that, but be aware that gifts could be subject to the seven-year tax rule, which we explain below.

Beware: the taxman has always got an eye on who might be giving away their money just before they die. So make sure you stick to the rules.

Remember the seven-year rule

If you go over the inheritance tax-free threshold, gifts will only be completely free from IHT if you live for seven years afterwards.

If you die in less than seven years and have given away more than your tax-free allowance, the gift will be taxed on a sliding scale:

So if you are serious about keeping your estate from the taxman’s clutches, it’s best to start this gifting now.

Gifting property is another way to avoid inheritance tax, but again there are strict rules around this, which we explain here.

5. Grow your pension pot

Pension savings can be passed on to family when you die without being subject to inheritance tax. This is because pensions don’t usually form part of your taxable estate.

But bear in mind that:

• If you die before the age of 75 one or more people can inherit the pot as a tax-free lump sum
• If you die after 75 those inheriting the pension pot have to pay their highest rate of income tax on any withdrawals

So if possible keep your pensions intact, and focus on spending or gifting money from ISAs or other savings.

6. Draw up a trust

You may want to consider putting some of your assets into a trust for a loved one.

A trust is a legal agreement. You decide who manages the money (the trustees) and who the money is used for (the beneficiaries).

There are lots of different types of trust and some will allow you to ringfence the money or property so that it sits outside of your estate when you die.

Trusts are a complicated area and can be expensive to set up. Some are subject to other tax regimes, so you should get authorised and regulated, specialist advice.

Bear in mind that you may face tax charges when:

• Setting up the trust
• When property leaves the trust
• On certain anniversaries

WARNING: Trusts are complicated, so do seek expert advice. The Society of Trust and Estate Practitioners can help you find someone.

7. Unusual methods

There are other more unusual methods to reduce your IHT bill, including:

• Giving cash to political parties
• Investing in shares on the Alternative Investment Market (AIM)
• Buying agricultural land

We go into these other methods to reduce IHT in more detail here.

Checklist:

• Use a free calculator to check your likely IHT bill
• Write a will
• Try to preserve pensions and spend your other savings
• Consider gifting cash and assets now
• Think about paying for specialist advice
• Plan ahead