posted 4th May 2025
Starting your inheritance tax planning early and taking financial advice can have a direct impact on your family’s financial wellbeing after you’re gone. Here is an introduction to some of the most effective ways to mitigate IHT in the UK:
1. Make Use of the Nil-Rate Band and Residence Nil-Rate Band
Nil-Rate Band (NRB): The first £325,000 of an estate is tax-free.
Residence Nil-Rate Band (RNRB): An additional £175,000 (as of 2024/25) can be claimed when passing a main residence to direct descendants.
Transferable Allowance: Unused NRB and RNRB from a late spouse/civil partner can be transferred to the surviving partner.
2. Make Lifetime Gifts
Potentially Exempt Transfers (PETs): Gifts to individuals are exempt from IHT if you survive for 7 years.
Taper Relief: Reduces IHT payable on gifts made 3–7 years before death.
Chargeable Lifetime Transfers (CLTs): Gifts into most trusts, taxed if they exceed the NRB.
3. Use Annual Exemptions and Allowances
Annual Gift Allowance: £3,000 per year per donor.
Small Gift Exemption: Up to £250 per person per year to multiple individuals.
Wedding Gifts: £5,000 to a child, £2,500 to a grandchild/great-grandchild, £1,000 to others.
4. Regular Gifts from Surplus Income
Gifts made regularly from surplus income (not capital) can be IHT-free if properly documented and don’t affect your standard of living.
5. Use of Trusts
Trusts can remove assets from your estate, but may have upfront IHT charges if over the NRB.
Discretionary trusts or bare trusts are common.
Useful for asset control and protecting beneficiaries, though complex rules apply.
6. Business Property Relief (BPR) and Agricultural Property Relief (APR)
Up to 100% relief for qualifying business assets, shares in unlisted companies, and agricultural land.
The asset usually must be held for at least 2 years.
7. Take Out a Life Insurance Policy
A whole-of-life policy written in trust can cover the expected IHT bill.
Keeps the payout outside the estate for IHT purposes.
8. Charitable Giving
Gifts to UK-registered charities are exempt from IHT.
If 10% or more of the estate is left to charity, the overall IHT rate reduces from 40% to 36%.
9. Spend It!
Reducing your estate by spending or gifting sensibly during your lifetime is one of the simplest ways to avoid IHT.
10. Professional Planning
Engage with a financial adviser or estate planner to ensure strategies are tailored, compliant, and tax efficient.
11. equity release
If all your wealth is tied up in your property, you may not be able to make use of gifts during your lifetime or spend your wealth on yourself. To get around this, some people take out an equity release lifetime mortgage.
Important Disclaimer:
Before making any investment decisions, always seek professional, regulated, independent financial advice.
Contact Finance Connect.UK and let us connect you with a fully qualified, FA-regulated, Independent Financial Adviser today.