how to avoid inheritance tax


21 ways to avoid inheritance tax – Protect your property and your wealth 

Inheritance tax, sometimes called IHT, is a tax placed upon money and property that is gifted or inherited.

Understandably many people approaching older age want to protect their estate and loved ones from the impact of IHT. This is often known as Estate Planning.

Before taking any action, we strongly recommend you check the tax rules, as things may have changed since we wrote this article.  

In this article on avoiding inheritance tax, we will:

  • Explain what inheritance tax is, and how it works
  • What your IHT allowances are
  • How to reduce inheritance tax 
  • Different ways of mitigating inheritance tax
  • How to avoid inheritance tax on property and get a tax bill
  • Help you to understand how inheritance tax can be minimised or avoided
  • Answer the question ‘How much is inheritance tax?’
  • Talk about the importance of estate planning and inheritance tax implications
  • Discuss the use of trust funds and how this can help you to minimise the amount of tax your loved ones will have to pay

Topics that you will find covered on this page

Before we start, here is a short video explaining inheritance tax and tips you can use when looking at loopholes to avoid inheritance tax.

You can see the youtube video on how to avoid inheritance tax here.

What is inheritance tax?

Often referred to as the “tax on inheritance,” inheritance tax is a charge levied against the estate of a deceased individual. Instead of the decedent, inheritance tax is the duty of the beneficiaries or recipients of the estate.

The tax is computed based on the value of the residual assets, such as real estate, investments, and personal property, surpassing a predetermined government threshold. The best way to avoid or reduce inheritance tax is through careful estate planning and taking advantage of tax reliefs and exemptions provided by the government.

This may entail using exemptions, such as the home and nil-rate bands, gift-giving techniques, the creation of trusts, or the bequest of assets to tax-exempt recipients, such as charity.

Even while there are legal ways to lessen inheritance tax, it’s vital to remember that trying to evade or avoid the tax by illicit means is not recommended. Using tax evasion strategies that are against the law might result in harsh fines and other legal repercussions.

It is always advised to obtain professional guidance from tax consultants or estate planning specialists to investigate legal methods for reducing inheritance tax and guaranteeing adherence to applicable tax legislation.

When do you pay inheritance tax?

When someone passes away and leaves behind an estate that exceeds the government-set inheritance tax threshold, inheritance tax is normally paid. Instead of the departed person, it is the duty of the beneficiaries or recipients of the estate to pay the inheritance tax. 

Typically, the tax is owed six months after the end of the month of the deceased person’s passing. However, depending on the situation, some particular guidelines and exemptions can be applied. 

Due to the complexity and changeability of inheritance tax rules, the best inheritance tax planning (IHT planning options) and ensuring compliance with applicable laws necessitate professional assistance from tax consultants or estate planning experts.

While there are legal ways to cut inheritance tax through meticulous estate planning, it’s crucial to distinguish between doing so and using shady tax evasion methods. Engaging in tax evasion methods that are against the law can lead to harsh fines and legal repercussions.

Therefore, it is crucial to get expert counsel and investigate legal options for lowering inheritance tax, such as utilising tax reliefs and exemptions, making use of allowances, creating trusts, or donating assets to tax-exempt beneficiaries like charities. 

These strategies can lessen taxation while maintaining the necessary legal parameters.

How much is inheritance tac?

Inheritance tax is calculated based on the value of the assets left behind by an individual after their death.

The calculation considers various factors, including the total value of the estate, any applicable exemptions, and the relationship between the deceased and the beneficiaries.

Assets such as property, investments, and possessions are considered, along with any trusts and wills that may be in place.

Inheriting a car, for example, would be included as part of the estate’s value. The tax is then levied on the portion of the estate that exceeds the inheritance tax threshold, with different tax rates applying depending on the circumstances.

However, giving money or assets to family members during your lifetime can potentially reduce the value of the estate and, consequently, the overall inheritance tax liability upon death.

It is essential to consult with tax advisors or estate planning professionals to understand the specific calculations and potential strategies for mitigating inheritance tax obligations.


1 – Make a gift to your partner or spouse

When you are married, or in a civil partnership, you can give anything you own to your civil partner or spouse. This means that your estate will not have to pay inheritance tax on what the gift is worth.

This is perhaps the best way to reduce inheritance tax but there are rules to remember with this option – which can become complex if your spouse/civil partner was born outside of the UK or permanently lives outside of the UK. If this is the case, you should seek professional inheritance tax advice advice.

2 – Give money to family members and friends

You can give money or assets as gifts to family members and friends who are not classed as your partner or spouse. It is only classed as a gift if you are giving it outright (so that you no longer have any benefit from it). If you do this, then you will not need to pay inheritance tax.

The value will still be included in your estate value for inheritance tax purposes – but only for seven years.

After this time, it is excluded from the total value and, therefore, cannot be taxed. Remember that you can only give away limited amounts per year – up to £3,000 annually.  Therefore, you should try and give your money away, up to £3,000, seven years before you pass.

Capital Gains Tax may be payable on certain assets – so it’s worth discussing gifts with your solicitor or financial advisor to be completely sure.

3 – Leave money to charity

As mentioned above, if you leave all of your estate to charity, there will be no iht to pay. However, many people only wish to leave a portion of their estate to charitable causes and the rest to family members and friends.

There are still advantages to charitable donations upon death – if you leave 10% or more of your estate to a charity, the amount due on the rest will decrease considerably. This is because instead of being calculated at a tax rate 40% the rate reduces to a tax rate of 36%.

4 – Take out life insurance

Taking out life insurance and directing the money into a trust will not directly reduce the amount of inheritance tax you’ll have to pay – but it will make it easier for your surviving family members to pay the inheritance tax bill.

If paid via a trust, the proceeds from a life insurance policy are not taxable.  

The payout from the full life insurance policy may prevent them from having to sell the family home, for example.

5 – How to avoid inheritance tax on property

Many people want to look at “how to avoid inheritance tax”. This section will discuss inheritance tax loopholes.

One issue that many people wonder about is how to avoid inheritance tax on a property.  Whilst this is a complex subject, a trust can be one way to achieve this and ensure that your estate does not have to pay inheritance tax.

This legal arrangement enables you to give cash, property or investments to somebody else to look after for the benefit of a third party.

You can, for example, put savings in trust for your children – or a spouse or civil partner.

There are two important roles required within a trust fund.

The first is a trustee (the person that owns and manages the assets in the trust). The second is a beneficiary (the person that the trust is set up for. Often, they cannot manage it themselves due to age, disability, etc.).

When you put items in a trust they no longer belong to you – and this is where the inheritance tax benefit arises.

If you’ve read the options above and are still unsure about which to take, you may like to consider setting up a trust to avoid inheritance tax. Many types of trusts are available – all with advantages and disadvantages depending on your situation.

Setting up a trust to avoid inheritance tax has a range of implications for you and your family members, so it’s advisable to discuss these at length with your solicitor or financial planner when considering your inheritance tax planning options.

6 – Take Advantage of Business Owner Exemptions

If you are a business owner, you can transfer interest in your business to a friend, relative or business partner without being subject to inheritance tax. This transfer can be made before or at the time of your death.

It is possible to transfer shares and other finances related to business to a business partner without paying any tax. You can then specify that certain assets are transferred to your loved ones at a suitable time after your death.

7 – Transferring Agricultural Land or Buildings

Under the terms of Agricultural Relief, it is possible to transfer certain types of buildings and agricultural land without being subject to inheritance tax.

8 – Give Away Your Assets Before You Die

Of course, waiting until you die to distribute your belongings is no longer necessary. As you become older, you are likely to find that many of the assets that you have accumulated are not needed and this is the perfect time to pass them on.

It may be a good idea to seek legal representation to ensure that your assets are distributed fairly and that there are as few conflicts as possible.

Take the time to work out how much you need to live on and consider giving everything else away to your close friends and relatives.

how to avoid inheritance tax on property

11 – Buy a funeral plan

The cost of a funeral is rising, and the average cost is between £3,000 – £6,000 nowadays.  Therefore, you can deal with this cost upfront by using a prepaid funeral plan.

These allow you to pay for your funeral up front, meaning that money can’t count towards your inheritance.

12 – Give away assets that are free from Capital Gains Tax

If you own assets, such as shares or property, that have fallen value since you bought them, they can be passed on without attracting capital gains tax (CGT).

13 –  Spend, spend, spend

It’s your money so you can spend it! Why save your money knowing that a significant portion of it could be taken away through inheritance tax?

Instead, why don’t you enjoy life and treat yourself to some nice holidays and gadgets that will make your life easier.   A good example could be an electric recliner chair.

"Gifts in the form of property or money that you present to a relative at the time of their wedding are not subject to tax and therefore there would not be an inheritance tax bill when you die."

14 – Stay below the UK inheritance tax threshold

In 2015 the government announced that when parents or grandparents pass on the main residence to their children, step-children or grandchildren, and if it is worth up to £1 million (£500,000 for single people) then Inheritance Tax would be scrapped.

The threshold for inheritance tax is currently £325,000. This is also known as the nil rate band and can be transferred to a spouse or civil partner on death.  Therefore, giving you a total nil rate band of £325,000.

The basic allowance of £325,000 remains unchanged. What has changed is the introduction of the new ‘residence nil rate band’ (RNRB).  This is also known as the ‘main residence’ band.

You’ll receive this additional allowance on top of your existing property allowances, if you pass on your main residence.

It was introduced as part the 2017/18 tax year and was phased in gradually, reaching a £1m exemption for couples in the 2020/21 tax year.

The 2019/20 tax year has seen the residence nil rate band (RNRB) allowance go up to £150,000 (meaning a total individual allowance of £475,000 when you add the £150,000 to the £325,000 allowance). 

The £150,000 allowance will rise again by £25,000 in 2020/21.  Therefore, the new allowance will be £175,000 (meaning a total allowance of £500,000). 

17 – Use an insurance policy

The use of insurance plans is another method for minimising inheritance tax liabilities. They permit you to pay a lump sum that will be used to settle any estate tax due upon your death.

The policy may also include other benefits, like as coverage for funeral expenses or debt repayment. The policy can also be structured to pay the money immediately upon death or as a lump sum following probate.

This form of insurance coverage is called “inheritance tax protection” or “inheritance tax mitigation.” Before establishing such a policy, it is vital to get professional guidance.

18 – Make frequent gifts

Making frequent gifts from your income rather than your capital could benefit estate tax planning.

This is because repeated gifts over time can diminish the value of your estate, so potentially reducing the amount of inheritance tax you may owe upon your death. 

19 – Transfer assets to a dependent

Some of your assets, such as your spouse or children, can be transferred to others while you live.

This is referred to as “making a gift,” It decreases the value of your estate, so it decreases the amount that may be subject to inheritance tax upon your death. Additionally, donations between spouses are not subject to inheritance tax.

Before doing so, it is essential to seek professional guidance, as there may be tax ramifications in terms of capital gains tax or income tax.

20 – Make use of business relief

Business relief (BR) exempts some types of assets, such as company shares and partnership interests, from taxation. This means that the value of these assets is not included in your estate for purposes of the estate tax.

BR also applies to a number of agricultural and forest properties, as well as many life insurance plans. However, it is crucial to note that BR may only be accessible if certain requirements are met.

Consequently, it is prudent to consult expert advice before utilising this remedy.

21 – Make use of the Residence Nil Rate Band

The Residence Nil Rate Band (RNRB) is an additional inheritance tax exemption applicable to a residence. It is currently set at £175,000 per person or £350,000 per couple.

It applies in cases where the deceased held a UK residential property that is passed on to immediate descendants such as children and grandchildren upon death.

It can be used with other inheritance tax reliefs, such as trusts and gifts described above. However, it should be emphasised that there are certain restrictions.  Therefore,  professional guidance should be sought before utilising this relief.

inheritance tax loopholes

Inheritance tax loopholes in the UK

We hope you found this article with a range of inheritance tax loopholes and ways to reduce inheritance tax that you can use. If you speak to an accountant or lawyer, they will more than likely be able to provide advice on inheritance tax by identifying more inheritance tax loopholes that you can utilise to protect you and your family from the tax man.

Overview of inheritance tax in different countries

The inheritance tax is a tax imposed on the estate of the deceased. There is no inheritance tax in some countries. Inheritance tax rates vary from country to country.

The current inheritance tax rate in the United Kingdom is 40% on estates worth more than £325,000.

There is, however, a tax-free threshold, known as the “nil-rate band,” which allows individuals to pass on assets up to a certain value without paying any taxes. The current nil-rate band in the United Kingdom is £325,000.

Common misconceptions about inheritance tax

There are numerous misunderstandings regarding inheritance tax, including the notion that all inherited assets are subject to inheritance tax. In reality, only estates that exceed the exemption amount are subject to inheritance tax.

The estate executor is responsible for paying the inheritance tax from the estate’s funds, contrary to the belief that beneficiaries must pay the tax.

When is the inheritance tax due?

An inheritance tax is due when an individual’s estate is worth more than the current exemption amount. The tax is due at the current inheritance tax rate on the estate’s value above the threshold. The estate tax is the responsibility of the executor.

Inheritance tax planning for blended families

There may be stepchildren, half-siblings, and other family members to consider when planning an inheritance tax strategy for blended families. One strategy is to utilise the “potentially exempt transfer” (PET) rule, which permits individuals to give away assets tax-free so long as they survive seven years after the gift.

Another option is establishing a trust that can provide for all blended family members.

How to minimise inheritance tax when passing on a business

Transferring a business could result in a hefty inheritance tax bill. However, several tax-efficient strategies are available for inheritance planning, such as utilising business relief to reduce the business’s taxable value.

Additionally, it may be possible to transfer the business to family members through a trust, which can provide asset protection and reduce potential tax liability.

Inheritance tax planning for non-UK domiciled individuals

Regarding inheritance tax, non-UK residents may be subject to different tax obligations. For instance, if they are deemed to be domiciled in the United Kingdom, their worldwide assets may be subject to inheritance tax.

The “remittance basis” of taxation, which allows individuals to pay tax on foreign income and gains only when brought into the UK, is one strategy for minimising inheritance tax for non-UK domiciled individuals.

Planning for inheritance tax in the event of second marriages

Inheritance tax planning for second marriages can be complicated, especially if children are from prior relationships.

One option for providing for all family members, including stepchildren, is to establish a trust. Use the “unused annual exemption” from previous tax years, which can be carried forward for up to four additional years.

How to avoid inheritance tax with a trust

An efficient way to reduce inheritance tax is by using a trust. The following are some crucial actions to take into account when using a trust to avoid or decrease inheritance tax possibly:

Establish the right trust

Work with a qualified professional, such as a trust and estate lawyer, to determine the most appropriate type of trust for your specific needs and goals. Discretionary trusts, interest-in-possession trusts, and gift and loan trusts are typical alternatives.

Transfer assets to the trust

Once the trust is established, transfer assets, such as property, investments, or cash, into the trust. As a result, these assets are no longer considered a part of your estate for inheritance tax reasons.

Survive the seven-year rule

In the United Kingdom, for instance, if you survive for at least seven years after making a gift into a trust, it will typically be exempt from inheritance tax. Understanding and abiding by your area’s particular laws and regulations is crucial, though.

Utilise the exemptions and reliefs that are available

Look into the different inheritance tax exemptions and reliefs that can be applied to the trust structure. The yearly exemption, modest gift exemption, business property relief, and agricultural property relief are a few examples of these that may apply to certain kinds of assets.

How to use the inheritance tax loophole that allows unlimited gifting 

It is crucial to understand that calling gifting a “inheritance tax loophole” might be deceptive. The idea that unrestricted gifting is a loophole is untrue, despite the fact that there are several exclusions and reliefs for gifts that can help lower inheritance tax.

In actuality, gifting is subject to a number of regulations and restrictions, such as annual exemptions, small gift exemptions, and potentially exempt transfers.

It is essential to seek the guidance of a knowledgeable tax advisor or estate planning specialist who can provide customised advice based on your unique circumstances and ensure compliance with applicable tax rules and regulations in order to manage the complexity of inheritance tax and gifting.

How do you pay inheritance tax if you have no money

There are choices available if you do not have enough money to pay the due inheritance tax. First, you might be able to work out a payment plan with HM Revenue and Customs (HMRC) to spread out the tax obligation over time.

Alternatively, the estate’s assets could be liquidated or sold to raise the money required to pay the inheritance tax. Beneficiaries may occasionally consider taking out a loan or using other financial resources to pay the tax obligation.

It is essential to obtain professional guidance from tax advisors or estate planning specialists to examine the possibilities and choose the best course of action depending on your unique situation.

How to pay inheritance tax without selling property

There are a few options to take into account if you need to pay inheritance tax but don’t want to sell your property.

One choice is to consider taking out a loan or mortgage against the value of the property that is particularly intended to be used for paying inheritance tax.

This enables you to pay the tax debt and keep possession of the property. Another strategy is to make use of the “deferred payment” system, which is available in some jurisdictions and allows for the inheritance tax to be paid in interest-added instalments over time.

To grasp the precise alternatives and ramifications available in your jurisdiction and choose the best course of action for your circumstances, it’s vital to obtain professional assistance from tax consultants or financial specialists.

How to avoid inheritance tax on farms

Farms may be able to take advantage of certain deductions and reliefs intended for agricultural assets to avoid or minimise inheritance tax. Agricultural Property Relief (APR), a frequent relief, can significantly lower inheritance tax. 

The land and farm must meet specific requirements, including being actively used for agricultural reasons, in order to qualify. 

Another choice is to think about creating a trust, such a farming partnership or a family farming business, which can assist in managing and protecting the assets while possibly offering tax advantages.

To ensure compliance with the qualifying requirements and explore the best methods to reduce inheritance tax on farms based on your particular circumstances, it is essential to speak with tax consultants or estate planning experts who specialise in agricultural tax planning.


Tax-efficient ways to gift property to children or grandchildren

There are several tax-efficient ways to gift property to children or grandchildren, such as utilising the “gifts out of income” exemption, which allows individuals to make tax-free gifts so long as they are derived from their regular income.

A second option is to utilise the “small gifts” exemption, which allows individuals to give up to £250 tax-free to unlimited recipients in a single tax year.

If you are not domiciled in the United Kingdom, you may be subject to UK inheritance tax on any UK property you own. In certain instances, a double tax treaty may be possible to reduce the potential IHT liability.

Understanding the rules and planning accordingly can be aided by consulting a knowledgeable, independent financial adviser with expertise in this area.

When leaving assets to a disabled beneficiary, it is crucial to consider the inheritance tax ramifications. One way to protect your estate is to establish a trust for the benefit of disabled individuals.

These are known as disabled person’s trusts, and they can provide the beneficiary with valuable asset protection while minimising their potential IHT liability. In addition, gifts to a disabled recipient are generally exempt from tax, so taking advantage of this exemption can be an efficient way to transfer assets.

Family investment corporations can also be utilised to reduce inheritance tax. By transferring assets to a company, you may reduce the value of your taxable estate, and by taking advantage of the company’s tax planning opportunities, you may be able to minimise the tax on any gifts or transfers to your heirs.

Before establishing a family investment company, it is essential to seek professional guidance to ensure that it is structured in a tax-efficient manner.

Executors play a crucial role in estate tax preparation. They are responsible for administering the estate and settling any tax obligations. Choosing your executors carefully and discussing your wishes with them is essential to ensure they understand their legal obligation and can effectively carry out your wishes.

Executors can also take advantage of various tax planning opportunities, such as transferring assets to beneficiaries tax-efficiently or utilising business relief to reduce the IHT bill.

It is crucial to consider the effects of inheritance tax on beneficiaries and heirs. In some cases, valuable property or assets may need to be sold to pay the inheritance tax bill.

An equity release scheme or a lifetime mortgage may be an option for those who need to borrow money to pay the IHT bill. Still, it is crucial to consider the potential risks and costs associated with these options. Plan ahead and seek professional counsel to minimise the inheritance tax’s impact on your loved ones.

Inheritance tax avoidance

Inheritance tax avoidance and planning is an important issue for those who are trying to preserve their assets for future generations. 

Many people choose to do this through trusts, gifting or using other estate planning strategies. It is also important to consider the tax implications of any such action before taking it, as there can be hefty penalties for not paying the correct amount of tax due.

Trusts can be used to minimize taxes on inheritance, as they allow assets to pass to future generations without being taxed at the time of transfer. It is important to understand how trusts are taxed and the different types available in order to ensure that all beneficiaries receive the intended benefit from them.

What is the 7 year rule in inheritance tax?

Inheritance tax in the UK has a rule called the “7-year rule,” which says that gifts made during a person’s life may still be taxed as part of their estate after they die. 

If a person gives away an asset and then lives another seven years, the value of the gift is usually not subject to estate tax. But if the person dies within seven years of making the gift, a tapered relief may apply. This means that the tax paid will go down the longer the person lived after making the gift. 

If the person dies within three years of making the gift, the full estate tax will be due. The 7-year rule is an important part of estate planning because it lets people give assets to recipients without paying too much in taxes.

Meet the author

Rob Atherton

Rob Atherton

Rob writes and edits the content produced by the rest of the team. He has a degree in History from Leeds University and has producing, reviewing and editing the site since 2016

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Frequently Asked Questions

Tax-efficient ways to gift property to children or grandchildren?

Gifting property to children or grandchildren can be a tax-efficient way to reduce an inheritance tax liability. The key is to minimise any potential tax consequences. One option is to make use of the annual exemption, which permits you to make gifts of up to a certain amount annually without incurring inheritance tax. The annual exemption is £3,000 beginning in 2023. You can also take advantage of the small gift exemption, which allows you to give up to £250 per person per year tax-free. Additionally, if you outlive the gift by seven years, it will not be included in your estate for inheritance tax purposes.

How can business relief be used in inheritance tax planning?

Business relief, also referred to as business property relief, is a valuable inheritance tax relief applicable to certain types of business assets. It can be used to reduce the value of your estate for inheritance tax purposes or exempt specific assets entirely from inheritance tax. Assets such as shares in unlisted companies, certain types of business property, and qualifying investments in certain types of companies qualify for business relief. Depending on the circumstances, the relief is equal to either 50% or 100% of the asset’s value. Business relief can be a valuable tool in inheritance tax planning, particularly if you own a business or have investments in certain types of companies.

How can a family investment company be used to minimise inheritance tax?

A family investment company is a private limited company that is set up to hold and manage family wealth. It can be a tax-efficient method of transferring wealth to future generations because it allows you to retain control of the assets while still transferring the benefits. The primary benefit of a family investment company is that it can be used to efficiently transfer wealth to future generations. For instance, you can make tax-free gifts of company shares to your children or grandchildren, up to a certain limit. Additionally, the company can be used to invest in assets exempt from inheritance tax, such as business assets and certain types of real estate.

The role of an independent financial adviser in inheritance tax planning?

When it comes to inheritance tax planning, an independent financial advisor can be a valuable resource. They can assist you in comprehending the potential inheritance tax implications of your estate and offer guidance on how to minimise your potential inheritance tax liability. An independent financial adviser can also assist you in navigating the complex tax rules and regulations that govern inheritance tax planning and implementing effective strategies to minimise your potential tax liability. Overall, an independent financial adviser can be a valuable ally in your efforts to protect your estate and pass on your wealth in a tax-efficient manner to future generations.

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