5 Ways You Can Pay Less Inheritance Tax

Did you know that inheritance tax is a whopping 40% and is charged on all estates that are worth more than £325,000? With huge rises in property values over recent years, more and more people’s estates are being affected by inheritance tax. And, while inheritance tax can be incredibly complicated, there are some basic rules that you can follow to help reduce the inheritance tax bill that you leave your loved ones.

Make a Will

One of the simplest and easiest ways to manage how your assets are controlled on your death is by creating a valid Will. For couples that are married, intestacy rules ensure the surviving spouse inherits the estate of their partner, but for those who are unmarried the inheritance rules become a little bit more confusing. Making a Will gives you the greatest amount of control over how your estate and assets are allocated on your death and allows you to legally shelter your assets from inheritance tax by making gifts or setting up trusts for your spouse or a charity (neither of whom are subject to paying inheritance tax).

Use your allowances

There are many different types of allowances that you can use to help reduce your inheritance tax liability including the nil rate band and residential nil rate band. You don’t pay inheritance tax on the first £325,000 of assets which is known as the” nil rate band” or your “inheritance tax threshold”. If you die and leave your assets to your spouse, then they will also inherit your tax-free allowance giving them a total of £650,000 that can be gifted during their lifetime or on their death without paying any inheritance tax.

On top of the £325,000 per person there is also an additional residential nil rate band of up to £175,000 that applies to the main family residence. This again is passed on to the surviving spouse giving them a potential additional inheritance tax free allowance of £350,000.

With these two allowances, totalling £500,000, passing between spouses means that the surviving spouse could be eligible for a total tax-free allowance of up to £1,000,000 when they leave their main residence to their children (adopted, foster, or stepchildren) or to grandchildren.


Looking to reduce the amount of inheritance tax that your loved ones pay? Then make sure you put any investments in a pension and you “nominate” the benefit of such investments to those you wish to inherit when you die. Generally speaking, most pensions are treated as being outside of your estate which means they can be passed on to loved ones tax-free. There are many types of pensions, so it is worth seeking out financial advice to ensure that the one you choose is suitable for helping support you in your retirement.

Use exemptions

Some gifts are exempt from inheritance tax completely and so it is worth knowing about these in order to help you minimise your inheritance tax liability. Some of the exemptions that you need to know about are gifts to spouses, annual exemptions, wedding gifts, gifts to charities and political parties and small gifts. By far the biggest exemption is for gifts to spouses, anything that you give to your spouse during your lifetime or upon death is free of inheritance tax.

Annual exemptions – You can legally give away up to £3000 a year without paying inheritance tax, this allowance can be carried forward by one tax tear allowing a total of £6000 to be given tax free.

Wedding gifts – Parents and stepparents can gift up to £5000 tax free, grandparents can give up to £2500 and friends and relatives up to £1000.

Gifts to charities or political parties – There is no limit on the amount of money that you can donate to charities and political parties. They can also help to reduce the inheritance tax rate to 36% if 10% of your net estate is passed to charity.

Small gifts – Gifts up to the value of £250 are defined as small gifts and you can make as many of these gifts as you like without paying any inheritance tax on these. Small gifts can’t form part of a larger gift.

Gifts out of Income – Whilst very detailed records will need to be kept, any gifts which are made purely from your income (as opposed to gifts that reduce the capital you own) will also be exempt.

Place life insurance in trust

If you have a life insurance policy and you die then your beneficiaries will receive a pay-out, but if you haven’t placed the policy in trust then inheritance tax could be due if the proceeds are automatically paid into your estate. There are many different types of life insurance policy with the most common being whole of life and term assurance policies. Term assurance policies cover you until you reach a specific age and are often used to ensure your partner can pay off a mortgage and give them additional financial support if you die. Whole of life policies will pay out on your death regardless of your age. By placing these in trust they will not form a part of your estate and so will not be liable for inheritance tax.