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Top Ten Ways To Reduce UK Inheritance Tax

Top Ten Ways To Reduce UK Inheritance Tax

If you are a UK resident or if you have assets in the UK, your estate will be susceptible to Inheritance Tax (IHT) when you pass away. For those who have an estate worth more than £325,000, this can be a concern as you will want to pass on as much of your wealth as possible instead of paying the 40% IHT. So, how can you pay less inheritance tax (IHT) or legally avoid it completely? Here are ten tips to help you pass on more wealth to your loved ones.

Potentially Exempt Transfers

Giving a gift to someone seven years before you pass away is a great way to reduce inheritance tax (IHT). There is a lot of unpredictability with this option as IHT is applicable if you pass away before seven years. However, if three years have passed, the rate of tax you pay will be lower.

Give Personal Gifts

You can give gifts of a certain value that are free from inheritance tax. You can give large gifts that can be up to a maximum of £3,000 and unlimited small gifts of £250 while wedding gifts can reach up to £5,000 for children and £2,500 for grandchildren. You can also make regular payments that are part of your normal expenditure too such as quarterly payments to cover certain costs and these will be exempt from IHT.

Make Charitable Gifts

You can give gifts to registered charities as a way of helping to reduce the size of your estate, taking it below the inheritance tax threshold. Should you give a minimum of 10% of your estate to charity then your rate of IHT will drop from 40% to 36%.

Inheritance Tax & Life Insurance 

A life insurance policy written under a suitable trust will ensure that a lump sum is paid when you pass away. This can then be used to pay your inheritance tax bill and it will not be classed as part of your estate.

A life insurance policy called ‘term assurance’, can also be taken out to cover the IHT that might need to be paid on any gifts you make if you die within seven years of making them.


Pensions are usually not included in the value of your estate and they can be passed on free of inheritance tax. You will need to name a beneficiary who will receive your pension and you can also make payments into someone else’s pension during your lifetime, helping to protect the money from inheritance tax.

We often help clients set up a Junior Self-Invested Personal Pension for a child or grandchild under the age of 18 in which you can contribute up to £2,880 annually free of inheritance tax. However, your children or grandchildren will not be able to access this money until they reach UK pensionable age or until age 55 (this will be rising to 57 in 2028 and likely to rise further).

Discretionary Trusts

You can reduce your inheritance tax liability by using a discretionary trust. You can put the money in the name of your beneficiaries whilst still having control. With this type of trust, you can pay in as much as £325,000 using your nil-rate band and this will be excluded from the value of your estate after seven years.

Loan Trusts

You can loan money to a trust if you want to protect it but would also like to be able to access it when you need it. You can always withdraw the money but any growth on that capital will be protected from inheritance tax.

Discounted Gift Trusts

You can use discounted gift trusts to ensure that some of your wealth is passed on to your beneficiaries upon your death although you will be able to have any generated income paid to you during your lifetime. The wealth contained within the trust will be discounted from your estate although you could still receive regular payments from it.

Business Relief

It’s possible to pass on business assets during your lifetime or after you pass away with an inheritance tax relief of as much as 100%. Whether it’s a business, an interest in a business or shares in an unlisted company, all will benefit from 100% business relief. The likes of land or machinery will benefit from 50% business relief whilst shares that give control of more than 50% of the voting rights of a listed company will also have the same relief.

Agricultural Relief

If you have agricultural property such as land or pasture that is used to rear animals or grow crops, then this can be passed on and will be free of inheritance tax.

Need Help With All Your Inheritance Tax And Estate Planning Matters?

With legislation changing every year, there’s no doubt that inheritance tax can be a complex topic for many (especially if you live in Hong Kong). However, if you seek professional help and put the right plan in place, it is very likely you will be able to reduce or even eliminate a potential inheritance tax liability. To ensure that you protect your wealth and take advantage of the options available to pass on as much of your wealth to your loved ones, contact us to discuss your options.

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