Ways To Reduce Inheritance Tax – Five Strategies

Mitigating Inheritance Tax (IHT): Our Five Key Strategies

Inheritance tax, or IHT, is payable in the UK when a person passes away. The government takes 40% of the value of a person’s estate above the tax-free allowances available when they die. Their ‘estate’ includes their property, money, and possessions.

According to recent HMRC figures,  in the 12 months to August 2025 the UK government received £8.44bn in inheritance tax. This was up 8.5% on the previous year. The OBR’s latest Economic and fiscal outlook (EFO), published 26 March 2025, forecasts IHT will bring in £9.1 billion for 2025/26, rising to £14.3 billion for 2029/30.  

Why are inheritance tax receipts increasing?

These current and expected increases in inheritance tax receipts are due to fiscal drag. In other words, due to the fact that property prices are rising but the thresholds for IHT are not rising with them. The residential nil-rate band is not expected to change before 2030, which means, unlike house prices, it will have stayed at the same level for 10 years! This means that more and more families are affected by IHT.

Understanding how inheritance tax works, and the strategies you can use to help mitigate it, will give you the best chances of preserving wealth for future generations. Within the current rules and regulations, there are five main ways you can approach inheritance tax planning to avoid unnecessary costs when a loved one dies.

How IHT works today 

As with any government tax, IHT is subject to change at any time. We are looking at the current rules and the changes that are anticipated in the near future. It’s important to continually review your IHT strategy and revise it as things change.

The nil-rate band is currently £325,000 and the residence nil-rate band is £175,000. This means you only pay tax (at 40%) on amounts above £325,000. There is an extra allowance available of up to £175,000 if you leave your main residence to direct descendants (children or grandchildren), unless your estate exceeds £2m. This means an individual can potentially pass on up to £500,000 tax-free.

Any money or possessions you leave to your spouse or civil partner is exempt. Your partner can also transfer any allowances they haven’t used. This means a couple could potentially pass on up to £1 million without incurring an IHT charge.

Anything after allowances and exemptions is taxed at 40%. Inheritance tax should usually be paid within six months of death, or it becomes liable for interest.

At the moment pensions are not included in a person’s estate and can be passed on free of IHT. However, from April 2027, most unused pension pots will generally be considered to be part of an estate. This means some families could expect much larger tax bills.

The five strategies for mitigating IHT

Planning ahead can make all the difference. With IHT you have five main strategies: 

1.  Spend it

If you use your wealth during your lifetime, there’s less to be taxed on when the time comes. You can use your money wisely to increase the joy in your and your family’s lives. However, remember this needs to be carefully balanced with the potential costs of care in later life. A professional financial adviser can model the likely costs and benefits for you so you can make the right decisions for your circumstances.*

2.  Gift it

You have access to an annual £3,000 annual gift allowance and it can be carried forward for a year if it’s unused. Small gifts of up to £250 per person per year are also allowable, along with wedding or civil partnership gifts (£5,000 for a child, £2,500 for more remote relationships or to the person you’re marrying, and £1,000 for anyone else).

Larger gifts can be given, but if you die within seven years of making a gift, it will be included in your estate. Your estate (not the recipient) is then taxed on a tapered-rate basis, depending on how long afterwards you survived for.

Surplus income can be gifted but gifts cannot come from capital – and they must be regular in nature, for example by paying monthly insurance premiums. If they reduce your own standard of living, they do not qualify. This exemption is typically underused but cannot be claimed after death.

If you do something like give away your house to your children but continue to live there, it’s seen as ‘gifting with reservation of benefit’. This would still be considered part of your estate. ‘Deprivation of assets’, or deliberately giving away assets to avoid care costs, can be challenged by local authorities.

It’s really important to get professional advice before taking any steps with gifting that seem like a good idea but could potentially lead to greater tax liability later.

3.  Trust it

Trusts can be used as tools to ‘remove’ assets from an estate. There are various types of trust, including discretionary, loan, and discounted gift. With trusts you can retain some control over how and when beneficiaries receive assets. Because there are complex rules around trusts and they can trigger tax charges when they are set up, it’s vital to take professional advice on what might be best for you.

4.  Invest it

Certain investments can be very tax efficient but these tend to be higher risk and therefore not suitable for everyone. Again, it’s essential to seek professional advice to ensure you are balancing tax efficiency with your overall financial goals.

5.  Insure it

It is also possible to use insurance to cover your potential IHT liability. A whole-of-life insurance policy held in trust is designed to pay out on death. Because it’s held in trust, the proceeds are not included in your estate. This means it can be used to settle your IHT liability quickly.  Premiums are usually paid for life, so it’s important to weigh up affordability and to ensure the policy is set up correctly. Although insurance doesn’t reduce how much tax you’ll need to pay, you’ll know that funds will be available to cover it.

Don’t delay inheritance tax planning

It’s easy to avoid planning around inheritance tax because you think you need to retain total control over your finances, or you’ll need everything for later life. However, there are plenty of solutions that will preserve your wealth without creating problems – it’s just about working out what’s right for you and your family’s circumstances.

Often a mix of different strategies can give the best results. The key is to start as soon as you can and review everything regularly: the earlier you start, the more options you have. Rules can change and so can your circumstances. Make sure you’re getting professional advice from someone you can trust.

Need professional advice on IHT planning?

At Paula Bicknell Wealth we have years of experience of helping our clients mitigate inheritance tax. Why not get in touch to arrange a no-obligation call to find out how we can help you pass your wealth down through the generations more effectively? We’re based in Theale, Reading, but we work with our clients remotely too. If you are already one of our clients, remember to make time for our regular reviews!

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

* Advice in this areas may involve a referral to Karehero, a care navigator and matching service provider, whose services are separate and distinct to those offered by St. James's Place.

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