Nifty ways to cut your inheritance tax

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Inheritance tax is complicated so we put together a guide to simplify it for you. In this article, we outline some clever ways to ensure the majority of your hard-earned cash and valuable assets are passed onto your loved ones.

What is inheritance tax?

A quick recap if you haven't read our guide: Inheritance tax is a tax on the estate (net worth) of someone who has died.

It is only payable if your property, possessions and assets are valued at more than £325,000.

Any part of your estate that is valued above £325,000 will be taxed by 40%. For example, if your estate is worth £525,000, the tax bill would be £80,000 (40% of £200,000).

If you're a homeowner and you want to pass on your home to your loved ones, you might also benefit from something called the Residence Nil Rate Band. This is an additional allowance and it's currently (tax year 2020/21) set at £175,000, effectively increasing the starting point for payable IHT to £500,000.

Here's some ways to reduce the IHT you may owe.

Spend or gift money

To kick things off, a simple way to reduce IHT is to spend or gift money, as this lowers the value of your estate.

There is a catch as you're only allowed to give away up to £3,000 each tax year without it being liable for tax. However, you can carry this forward a year, up to a maximum of £6,000 - so a couple could give up to away £12,000 tax-free.

If there are wedding bells on the horizon, you're allowed to give up to £5,000 to children and £2,500 to grandchildren who are tying the knot. You can make larger gifts but you need to live for more than seven years for the money to avoid paying inheritance tax. This is to stop people giving away all their assets on their deathbed to avoid inheritance tax.

Gifts to charities are also exempt from any inheritance tax and if you gift more than 10% of your estate in this way you'll reduce your overall IHT rate to 36%. Remember too, tax isn't payable on anything you leave to your spouse or civil partner.

Pay into a pension

Unlike ISAs and other savings accounts, a pension is usually held in trust and, therefore, is free from inheritance if you die before age 75, your children can take your pension as a lump sum or as income without paying any tax whatsoever.

If you die on or after age 75, the lump sum or income will be taxed at the beneficiary's rate of income tax.

Look at investment options

The Alternative Investment Market (AIM) is a market for small, growing businesses as opposed to the established ones you'll see on the Main Market. Investing in these stocks qualify a type of tax relief called Business Property Relief. If you buy shares in one of these companies they will be IHT-exempt as long as you held them for at least two years before passing away.

There isn't a definitive list of qualifying companies, but you can get an idea by looking at the stocks chosen by specialist AIM portfolio managers.

It's worth being aware that AIM-listed companies are generally riskier than those listed on the Main Market.

Equity release

Equity release is a way of accessing the cash (equity) tied up in your home.

There are a few different equity release products available. A lifetime mortgage enables you to borrow money against the value of the home which doesn't need to be repaid until you die or go into long-term care. When you die, the value of your estate (and hence the IHT bill) is reduced by the amount you still owe on your mortgage.

Conversely, a Home Reversion scheme lets you sell part of your home at a reduced market rate and remain living there. IHT is reduced by the fact that only part of the value of your home belongs to your estate. Be careful though, if you hold proceeds from the sale in an account then it will count as part of your estate, and you could be taxed on it.


It is possible to take out an insurance policy called 'Whole of Life' to pay an IHT bill. Much like the name suggest, 'Whole of Life' insurance remains in force for your entire lifetime and provides a guaranteed payment to your loved ones when you die.

The policy must be written in trust, otherwise the pay-out will be considered part of your estate. When you die, the policy pays out to the trust, which can then be used to pay the tax owed.

What next?

Tax is a complex area, and the rules change regularly, so if you're concerned about IHT it could be worth speaking to a financial adviser who specialises in estate planning.

You can find out more information here: A guide to inheritance tax

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