inheritance tax

8 Legal Ways to Reduce Your Inheritance Tax Bill

Amidst the golden tapestry of life’s chapters, there lies a moment when shadows and sunlight converge, and the legacy of generations awakens. In the corridors of wealth, where time’s gentle hand guides the fortunes of kin, a dance of numbers and wisdom unfolds. Like a symphony of autumn leaves, these legal secrets weave a tale of fiscal prudence.

But beneath the veil of numbers and strategy lies the heart’s desire—to preserve and protect. In the realm of inheritance, where fortunes meet their heirs, we find the artistry of tax reduction, a delicate brushstroke on life’s canvas, ensuring the legacy endures.

In the last year, HMRC collected £7 billion in Inheritance Tax. However, a large majority of estates in the UK don’t have to pay a penny. In this article, Lawhive’s wills, trust and probate lawyers explain how inheritance tax works and how you can go about legally protecting your legacy and reducing your inheritance tax bill.

What Is Inheritance Tax?

notebook tax

Inheritance tax is payable on a person’s estate when they pass away if the value of their estate exceeds the inheritance tax threshold.

An estate’s value is worked out by looking at how much a person’s assets are worth when they pass away minus any outstanding debts they may have.

If, after this calculation, the value of an estate is less than £325,000 or everything over that amount is left to a spouse, civil partner, charity, or community amateur sports club, then normally there is no inheritance tax to pay. Otherwise, the remainder of the estate over the threshold is taxed at 40%.

Why Does Inheritance Tax Exist?

The rationale behind inheritance tax is that the money that is paid to the state (remember that figure of £7 billion?) is redistributed to benefit the many instead of the few.

However, many people who might face a large inheritance tax bill see this as unfair. After all, income is already taxed, therefore why is it appropriate to tax it again?

As a result of this, many people seek to find ways to reduce the amount of inheritance tax their estate will be subject to before they pass away.

8 Ways to Avoid or Reduce Your Inheritance Tax Bill

last will and testament

In the UK, Inheritance Tax (IHT) is a legitimate concern for many individuals seeking to pass on their assets to loved ones efficiently. Fortunately, there are various strategies and considerations available to help reduce the burden of IHT. Here are some effective methods:

1. Make a Will

A will is one of the best ways to avoid inheritance tax and make sure your wishes are clear around who inherits certain assets when you die. Without a valid will, a person’s assets are distributed according to the rules of intestacy, which may mean more Inheritance Tax is payable on an estate.

But a will isn’t just a one and done job, either. It’s important to keep it up to date, especially if your financial or personal situation changes. For example, if you get divorced or remarried.

2. Be Aware of The Current Thresholds

In the Chancellor’s recent Autumn Statement, it was confirmed that the current Inheritance Tax threshold will be frozen at £325,000 for individuals until at least April 2028. But that’s not the full picture.

It’s important to remember that the nil-rate Inheritance Tax band is transferable to spouse or civil partner on death, which means couples can benefit from a total nil-rate band of £650,000.

Furthermore, the main residence transferable allowance is £175,000 in addition to the nil-rate IHT threshold. The upshot of this is that married couples or civil partners could pass on up to £1 million without having to pay inheritance tax.

As mentioned, the IHT threshold is frozen until April 2028, but it is possible for this to change after then.

3. Give a Gift

Making a gift to family and friends is a generous act that could potentially set them up for life. In some cases too, a gift made in the right way, at the right time, could be exempt from Inheritance Tax. That being said, there are some nuances to this.

For example, if you make a gift to your children but pass away before seven years have passed, it might be subject to inheritance tax. However, if you pass away after seven years of making it, it won’t.

For this reason, careful estate planning is highly recommended.

4. Use a Trust

When you set up a trust and put money or assets into that trust, legally those things don’t belong to you anymore and so they won’t be counted as part of your estate during probate.

A trust is also a good way to set aside money for your children or grandchildren, as you can set conditions around access to make sure it is protected.

5. Put Your Life Insurance in A Trust

life insurance

Life insurance payouts can be counted as part of your estate if it exceeds the current threshold. This can be avoided, however, by putting your life insurance in trust. This means that the money from your policy will be paid directly to beneficiaries without going through probate.

While this might seem like an attractive option, it is worth careful consideration as after a policy has been put in a trust you can’t usually change it. Similarly, it is worth keeping in mind that in some cases life insurance payouts could be used to pay an inheritance tax bill without the need to use savings or sell property.

6. Leave Money to Charity

Any money you leave to charity in your will is exempt from Inheritance Tax and will reduce the total amount of your estate on which IHT is payable.

There’s another not-so-well known benefit of leaving money to charity in your will, too. If you leave 10% of more of your estate to a qualifying charity, your Inheritance Tax rate is reduced from 40% to 36%

7. Take Equity Release

Equity release involves releasing money tied up in your home as a lump sum, in smaller amounts, or a combination of the two. But how can this reduce your inheritance tax bill?

Well, cash released in this way is tax-free, however it needs to be repaid upon death or when you move into a care home. Therefore, when your estate is valued, equity release counts as a debt (liability) and will be deducted from your assets, reducing its net worth.

Again, this can be quite a complicated area of estate planning that requires careful thought before jumping in. It’s also worth remembering the 7 year rule around gifted funds if you plan to give equity release cash to children, other family members, or friends.

8. Use Your Pension Pot Wisely

pension fund

Inherited pensions aren’t subject to inheritance tax. Combine this with recent changes to pensions where there is no longer a limit to the amount you can save in your pension, there is the potential to pass on a huge chunk of your savings to loved ones without the burden of inheritance tax providing you meet a certain criteria.

In short, putting more money into your pension now can be an effective way to avoid or reduce your inheritance tax bill in the future and pass on more savings to your loved one.


In conclusion, understanding the ins and outs of Inheritance Tax (IHT) and how to minimise your liability is not only a prudent financial move but also a responsible act of planning for your family’s future. While IHT is a reality many individuals in the UK face, there are legitimate and ethical ways to reduce your IHT bill.

That being said, before taking any action, it’s always advisable to seek professional help from a financial advisor or solicitor, who will be able to make sure the ways and means you choose don’t leave you vulnerable.