Inheritance Tax Mitigation Strategies

Posted on 25 May 2025

💡 Strategies to Reduce Your Inheritance Tax (IHT) Bill

Reduce your estate’s value early by using HMRC’s tax-free gift allowances:

Use your annual exemption: Gift up to £3,000 each tax year without triggering IHT. If unused, you can carry this forward one year.
Give small gifts freely: Hand out up to £250 per person per year to as many individuals as you like—completely tax-free.
Gift from surplus income: If your income exceeds your regular living expenses, you can make regular gifts out of income without incurring IHT—just be sure to document them properly.
Make larger gifts to individuals: These are Potentially Exempt Transfers (PETs). As long as you survive 7 years after making the gift, no IHT applies. If you die earlier, taper relief may reduce the tax due.

Trusts can help move assets out of your estate, though you must use them strategically:

Set up a discretionary or interest-in-possession trust to pass on wealth while controlling how and when beneficiaries benefit. Be aware that this might trigger a 20% lifetime IHT charge if you exceed your nil-rate band, and you may face 10-year periodic charges.
Consider a bare trust if you want a simpler route. The assets are treated as direct gifts to named beneficiaries and follow the PET rules.

Always seek professional advice before setting up a trust, as the rules can be complex.

Make use of exemptions that eliminate IHT altogether:

Leave assets to your spouse or civil partner (if UK-domiciled) to avoid any IHT on those transfers.
Gift to charities to take advantage of full IHT exemption. Moreover, if you leave 10% or more of your net estate to charity, the IHT rate on the rest drops from 40% to 36%.

Take full advantage of the tax-free thresholds:

Use your standard nil-rate band (NRB) of £325,000.
Claim the residence nil-rate band (RNRB) of up to £175,000 when passing your main home to direct descendants.
Transfer unused allowances between spouses and civil partners to potentially shelter up to £1 million from IHT.

If you hold certain types of assets, you may significantly reduce IHT:

Claim Business Property Relief (BPR) for qualifying shares in unlisted or AIM-traded companies—these can be eligible for up to 100% IHT relief.
Apply Agricultural Property Relief (APR) for qualifying farmland and buildings—offering up to 100% relief depending on how they’re used.

Consider using a whole-of-life insurance policy to fund your IHT liability:

Write the policy in trust so that the payout bypasses your estate.
This ensures your heirs receive immediate funds to pay IHT without needing to sell inherited assets.

Don’t forget—you can reduce your estate by enjoying your wealth now:

Spend on yourself, travel, experiences, or meaningful causes.
Alternatively, gift strategically over time to reduce your estate while benefiting loved ones during your lifetime.

For non-UK domiciled individuals, the scope of IHT differs:

As a non-dom, you’re generally taxed only on UK assets.
However, if you become deemed domiciled (after 15 of the last 20 UK tax years), worldwide assets become liable for IHT.
With domicile rules tightening, you should regularly review your status and consider planning steps such as excluded property trusts.

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