Inheritance tax: How you can legally avoid 40% charge and reduce bill | Personal Finance | Finance

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Inheritance tax is paid if you leave assets valued above a certain amount to your loved ones after you die. It is normally charged at a rate of 40 percent but there are lots of ways to legally reduce one’s bill.

Despite being one of the most hated taxes in the UK, according to HMRC figures, only one in 20 estates in the UK pay it.

Inheritance tax is based on the value of a person’s estate when they die. The Government gives everyone a tax-free limit, known as the nil-rate band, which is currently set at £325,000.

The smaller one’s estate is, the less IHT will be payable, if at all.

Laith Khalaf, head of investment analysis at AJ Bell, has looked at some of the ways people can reduce their inheritance tax.

He said: “Only around one in twenty five deaths result in an IHT liability, but at a rate of 40 percent it can really eat into the money you leave to your heirs if you fall foul of it.

“What’s more, that number is set to rise as the IHT nil-rate band has been frozen until 2028 and as asset prices rise, this will drag more estates into the IHT net. There are legitimate steps you can take to mitigate inheritance tax or avoid paying it altogether, though some of them are complex and potentially costly.”

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To reduce the size of one’s estate while they are alive, they could:

  • Spend their money
  • Gift the money to loved ones, such as helping children with a deposit for a home

Britons can give away money, property or other assets while they live without them forming part of their estate for inheritance tax purposes.

But gifts not covered by allowances could be affected by the seven-year rule.

If someone dies within seven years of making these gifts, IHT may be payable on gifts if the total value of the estate is more than the inheritance tax threshold.

Some gifts will only be completely free from IHT if people live for seven years after they have given it to them.

Once that time has elapsed, the gift sits outside one’s estate.


However If someone dies within seven years, then tax is charged on a sliding scale (but only if they give away more than the nil-rate band of £325,000).

If someone dies between three and seven years after making a gift, the inheritance tax due is tapered down on a sliding scale.

For example, the tax burden falls from 40 to 32 percent if someone lives for three years after making a gift, and from 32 to 24 percent if they survive for four years.

If the person dies between five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.

Mr Khalaf explained that there are some notable exemptions to this seven-year rule.

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In particular, everyone can gift up to £3,000 of their assets to beneficiaries each tax year without that sum becoming liable to inheritance tax, no matter when they die.

People can also carry forward any unused allowance to the next year – but only for one year.

If someone is married or in a civil partnership, they both could potentially give away up to £6,000 a year, or up to £12,000 if they hadn’t used the allowance the year before.

People can also give away up to £250 to as many other people as they like every year, with no inheritance tax implications.

Mr Khalaf continued: “A family wedding could be another occasion to consider passing some money on.

“Gifts of up to £5,000 to children made in advance of a wedding are protected from IHT, irrespective of when you die, and up to £2,500 for grandchildren.”

People can also give away wedding gifts when people get married or enter a civil partnership:

  • £5,000 to their children
  • £2,500 to a grandchild or great-grandchild
  • Up to £1,000 to anyone else

Britons can give payments to help with another person’s living costs, such as an elderly relative, an ex-spouse or a child under 18 or in full-time education.

Mr Khalaf continued: “You are also allowed to make gifts from your surplus income, provided they are regular and documented.

“The rules around this form of gifting are complex, so it’s probably a good idea to seek the services of a qualified financial adviser if you are going down this route.”

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