How to reduce your Inheritance Tax bill

Like many other taxes, Inheritance Tax (IHT) allowances have been frozen by the Chancellor, and whilst this sounds generous, we are actually paying more due to the frozen tax-free allowance for Inheritance Tax (also known as the nil-rate band) – coupled with rocketing house prices. Data from HMRC reveals that Inheritance Tax collected between April 2022 and February 2023 totalled £6.4bn, which is £900m higher than the same period last year.

What is Inheritance Tax?

When a person passes away, their estate is valued, and this value is subject to Inheritance Tax. It is estimated that 10,000 more families could end up paying IHT over the next few years, while the Treasury could receive nearly £8 billion per year. Generally, any excess over the nil-rate band (currently £325,000) is chargeable to inheritance tax at 40% however, there are ways to reduce your inheritance tax bill as we detail in our blog below.


1. Give your wealth away

The easiest way to pass your wealth onto your loved ones without paying tax is simply to give it to them. 

  • You can give up to £3,000 to loved ones each tax year without it becoming liable for IHT. If you didn’t use the allowance last year, you can combine it and pass on £6,000. 
  • Gifts of £5,000 to children for a wedding are also protected from IHT; grandchildren can have up to £2,500.

If you die within seven years of making a larger gift IHT will be payable as a sliding scale:

  • If you die three to four years after giving a financial gift, the IHT rate lowers to 32%.
  • At six to seven years, it falls to 8%.  

Another way to give away your wealth is to donate it. If you donate at least 10% of your estate to charity you will get a 4% discount on your IHT rate for the rest of your estate, lowering it from 40% to 36%.


2. Put your estate in a pension

Depending on the type of pension plan you hold, if it is kept invested, your pension could be used to pass on wealth as it is usually excluded from your estate for IHT purposes. By nominating beneficiaries for your pension should you pass away before you receive it, IHT is then not normally payable. 

If you die after the pension age of 75, your beneficiaries will need to pay income tax on the money they take out.


3. Invest your savings (carefully)

Making the right kind of investments might help you avoid IHT. For example, an individual savings account (ISA) can’t help as ISAs are exempt from income tax and capital gains tax, but they form part of your estate for IHT.

There could be other solutions such as investing with Alternative Investment Market (AIM) holdings. The companies listed on AIM tend to be smaller and more highly speculative in nature, in part due to AIM’s relaxed regulations and listing requirements. However, investing in AIM companies tends to be high risk investing and is not a route most people would consider. You should seek independent financial advice from an approved Financial Advisor before considering investing in this market, remembering that, when investing, your capital is at risk and you could lose some or all of your investment.


4. Set up a trust

Holding your assets in a trust could keep them out of your estate, and out of the taxman’s reach – but the position has become more complicated in recent years, and it might not always be suitable. However, Trusts do allow the trustee to control the assets, rather than them being passed onto the beneficiaries right away. This might help if your beneficiaries are not known for financial prudence or are young children. You should seek independent financial and legal advice before establishing a trust.


5. Insure your assets

You can take out a whole of life insurance policy large enough to mitigate some or all of your IHT liability. 

You may need to regularly review the level of cover if your estate increases in value as the original sum assured may not cover the whole IHT liability. Alternatively, you may choose a plan where the cover increases with inflation. Whichever option is chosen, have it written in trust. Also remember that whilst your beneficiaries won’t struggle with a huge inheritance tax bill when you die, while you are alive you will be paying monthly premiums so make sure you seek advice from a trusted Protection Insurance Advisor to source an affordable yet effective insurance policy.


Contact our Personal Tax team

Expert advice can be vital to help work out the total value of an estate, calculate how much Inheritance Tax is likely to be charged, to understand what options are available to manage your tax bill, and also to learn how to write up a will to be tax efficient.

Please talk to our helpful personal tax team about any Inheritance Tax related questions you may have and if you need a financial adviser or introduction to a legal specialist, we have a number of recommendations as part of our networked services and can help put you in contact with the right person. Call us on 0161 905 1801 in South Manchester or 01925 830 830 in Warrington, or you can email