The top 5 ways to cut your inheritance tax


It’s natural to assume that your estate will be handed over to your loved ones in-full when you die, but that’s rarely the case. One factor that could significantly reduce the amount of your estate that reaches your family is the dreaded inheritance tax (IHT).

Fortunately, there are ways to minimise the impact of inheritance tax and even avoid it completely if you put plans in place with the help of a professional service like that offered by Wills Services.

What is inheritance tax? Inheritance tax is a type of tax that is payable on an estate belonging to someone who has died (including their money, possessions and properties). 

What are the inheritance tax thresholds? IHT is charged at a rate of 40% on anything above the current inheritance tax threshold, which is £325,000. So, if your estate is worth £400,000 and your tax-free amount is £325,000, 40% of £75,000 would be deducted, resulting in a £30,000 inheritance tax bill.

How to avoid inheritance tax

Avoiding inheritance tax – or at least reducing its impact – can be done with some simple adjustments to the way you organise your estate while you’re still around. 

Here’s a list of five ways to avoid inheritance tax while staying on the right side of the law. 

1. Leave the estate to your partner

Estate inherited by married and civil partners is completely exempt from inheritance tax – surviving partners will not have to pay any IHT on the assets they receive from their husband, wife, or civil partner, regardless of its worth.

It’s also worth noting that surviving partners also receive the unused tax-free allowance of their spouse, which means that their basic tax-free threshold (also known as the ‘nil rate band’) could increase to £650,000 or even £950,000 in some cases.

2. Give to family members or friends: Gifts and inheritance tax

How much you decide to leave to your family and friends is entirely up to you, but in order for these ‘gifts’ to be tax-free, you must plan ahead. Why? Because gifts are only exempt from inheritance tax if you live more than seven years from the date they were made. 

Any income made from these gifts may have other tax implications – such as Capital Gains Tax – but IHT will only be payable if you end up dying before the seven years are up. 

So, if you’re considering making a gift to reduce the inheritance tax payable on your estate when you die, it’s important to keep a note of: 

  • What you gave away
  • Who received the gift
  • When you provided it
  • The value of the gift

The executor will then be able to work out the amount of your estate that is liable for inheritance tax during probate

3. Put your assets into a trust

What is a trust? A trust is a legal arrangement where you (the trustor) hand over assets to someone else (the trustee) in the knowledge that they will take care of it until the beneficiary (the person benefiting from the assets within the trust) is ready to receive it, provided the trust’s conditions are met. 

For example, you could put some money aside to be given to your children when the youngest child reaches 18 years old. 

When you put money or property in a trust, it is technically not your possession anymore. This means that it shouldn’t count towards the overall value of your estate when you die, and therefore may not be subject to inheritance tax (as long as certain conditions are met).

Read more about setting up a trust here.

4. Leave something to charity

As a way of encouraging more people to give to charity, any assets left to a charitable organisation during a person’s lifetime or in their will are exempt from inheritance tax. 

It could also reduce the total inheritance tax rate payable from 40% to 36% if you leave 10% or more of your ‘net estate’ to charity when you die. 

5. Take out life insurance 

It’s possible to set up a life insurance policy with the sole purpose of covering any potential inheritance tax liability.

You can also use life insurance to provide a tax-free lump sum pay-out to your loved ones when you die if you put it in trust. Putting life insurance in trust means that it is exempt from inheritance tax, just as any other assets placed in trusts are, so you could potentially leave hundreds of thousands of pounds in tax-free cash to your beneficiaries.  

Inheritance tax planning with Wills Services

If you want to ensure that your hard-earned estate is inherited by your loved ones in-full, without being reduced in any way, then it is crucial that you plan for the possible impact of inheritance tax. 

Contact us today for more information and advice on inheritance tax, and start writing your will today to ensure that your family and assets are protected when you are no longer around.

Article reviewed 21st September 2021

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