6 ways to reduce your inheritance tax

6 ways to reduce your inheritance tax

author: Sarah Neate

By Sarah Neate

Inheritance tax is a subject many don’t like thinking about, but it could be possible to reduce your bill if you take certain steps. Plan ahead and use these tips to keep the cost down.


What is inheritance tax and how much is it?

Inheritance tax is a tax paid by those who inherit property, money, or other items after someone passes. Tax is not payable if the total value of the deceased’s estate is less than £325,000, but anything over the threshold of £325,000 could be subject to inheritance tax at the standard rate of 40%.

So, if your estate is likely to be over £325,000, how could you reduce your inheritance tax bill and make sure your heirs receive as much of your estate as possible?

You could use this inheritance tax calculator to get an estimate of how much your inheritance bill could be. 

1. Make a will

The most important thing you can do is make a will. If you die without a will it’s known as intestacy. You’ll have had no say in what happens to your estate, and it will be divided up according to certain rules meaning heirs could face an inheritance tax bill that could’ve been avoided, or your assets might not go to the people you’d want. Find out who might inherit your belongings if you don’t make a will.

2. Leave your home to family

Leave your home to your spouse or civil partner and they won’t have to pay inheritance tax on it. If you leave it to your direct descendants (children or grandchildren) they will have to pay tax but the tax threshold increases in this case to £500,000. You must own all or part of your home and your entire estate must be worth less than two million pounds.

3. Gift away your assets

You can reduce the value of your estate by gifting items such as property, cash or other items before you die. If you live for seven years after making the gifts they won’t be subject to inheritance tax. If you die within seven years of gifting them then they’ll be subject to inheritance tax but on a sliding scale. You’re allowed to gift £3,000 a year tax-free and you can make gifts to family and friends. Some gifts may be subject to Capital Gains Tax so get advice if you want to do this.

4. Place property or other possessions in trust

When placing some of your assets ‘in trust’, you give up ownership of them. This means they are no longer part of your estate and so may not be subject to inheritance tax. There are several types of trust available for different uses and with different rules. You may still need to pay some tax, as well as fees to set one up, so research them carefully and get good advice before going ahead.

Instead of placing your property in trust, you could transfer a share of your house to your spouse or children. They would have to pay stamp duty on the value received over a £125,000 threshold.

5. Put a life insurance policy in trust

You could take out a life insurance policy to cover the potential inheritance tax bill. It would have to be placed in trust to save it from becoming liable for inheritance tax. Many life insurance providers let you place policies into trust, at no extra cost when you withdraw. You’ll need to appoint a trustee to look after the trust, and one or more beneficiaries. Trustees can be family members, or you can appoint a solicitor to act as a trustee, for a fee.

6. Leave something to charity

Assets that are left to charity aren’t subject to inheritance tax. If you leave 10% or more of your entire estate to charity then your other heirs, such as your children, will only have to pay 36% tax on what they inherit (above the threshold) instead of the standard 40%.

Please note, the rules around trusts can be complicated so you should seek independent financial advice.

Read on for more ideas on how to pay less tax.

Disclaimer: All information and links are correct at the time of publishing.

author: Sarah Neate

By Sarah Neate

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6 ways to reduce your inheritance tax 6 ways to reduce your inheritance tax