Why you might have a greater Inheritance Tax liability than you thought and useful ways you can reduce it


Grandchild hugs her grandparent

One of your financial goals may be to leave a legacy to your loved ones when you pass away. Or, you might prefer the “giving while living” approach and want to transfer wealth while you’re still around.

Either way, Inheritance Tax (IHT) – often called “Britain’s most hated tax” – could significantly reduce the amount your loved ones receive when you pass away.

So, it’s valuable to know as early as you can what your IHT position is. Despite this, a report from MoneyAge has revealed that just 8% of those aged 55–64 have taken action to ensure they don’t pay more IHT than is necessary.

Read on to discover why you may have greater IHT liability than you previously thought, along with ways to potentially reduce it.

Confronting the issue as soon as possible can be a great help

To say it’s unpleasant to speculate on your death and what consequences may come of it is certainly an understatement. 

Death is something we hate to think about, but it can be so useful in protecting your finances – and now more than ever.

In chancellor Jeremy Hunt’s autumn statement, the IHT nil-rate band of £325,000 was frozen until 2028. The chancellor also froze the residence nil-rate band – an additional allowance you can use if you plan to leave your home to a child or grandchild – at £175,000 until 2028.

This could mean as your estate continues to grow in value, the amount you can pass on tax-free remains stagnant. So, the value of your estate could exceed the nil-rate band when you may never have imagined this before.

Considering that some techniques to potentially reduce your IHT liability are time-sensitive, and with the nil-rate band freeze being extended to 2028, you might not have as much time to cut your IHT liability as you would like. 

So, starting to better understand your tax liability sooner rather than later could put the ball in your court when it comes to protecting the value of your estate.

You’ll usually pay IHT on the value of your estate above the nil-rate bands

For most people, there will be an IHT liability on the value of your estate above the relevant nil-rate bands (as outlined above), although IHT is generally exempt if passed between married couples and civil partners. If the threshold has not been fully used when the first person in a marriage or civil partnership dies, you can transfer it.

In other terms, you could pass on up to £1 million of your estate tax-free. 

Despite almost one-fifth of people aged between 55 and 64 estimating their estate to be worth over £500,000, as revealed in a survey reported by MoneyAge, only 22% of the same age group claim to know how much IHT they will owe when they die – a shockingly low statistic when you consider how much of your estate’s value may be subject to IHT.

So, leaving nothing to chance, you should make sure to be aware of the intricacies of IHT, and how much you may be liable to pay. We can help you to work out your potential liability.

There are a few ways to potentially mitigate your IHT liability

As everybody’s circumstances are different, some techniques to potentially mitigate your IHT liability may be more useful to you than others.

Here are some examples that you could consider using.


Through gifting money and assets throughout your lifetime, you could be able to reduce the amount of IHT your loved ones will be liable to pay when you pass away.

There are rules that stipulate how much you can give, and when, in order that these gifts fall outside of your estate. So, here are some of them to keep in mind:

  • Gifting annual exemption: Each tax year, you can give away a total of £3,000 worth of gifts without them being added to your estate. This is known as your “annual exemption”. As this is an individual exemption, this rises to £6,000 for couples. You can carry any unused allowance forward for one year, so if neither you or your spouse or partner made any gifts in this or the previous tax year, you could gift a total of £12,000 now that would fall outside the value of your estate.
  • Unlimited small gifts: To anyone who doesn’t receive a gift that forms part of your annual exempt amount, gifts of up to £250 can be given as often as you like.
  • Wedding gifts: Tax-free gifts can be given to people you know when they get married. You can give a tax-free gift of up to £5,000 for your children, £2,500 for your grandchildren, and £1,000 for other relatives and friends.
  • The seven-year time frame: As long as you live seven years past the giving of a gift, you can theoretically give as much as you like. However, if you die within seven years of making a gift, you may be subject to a tapered rate of IHT depending on a range of factors including how soon you died after making the gift.

Also worth remembering, should any of the gifts you give end up becoming taxable, they will be calculated as part of your NRB first.

If you die within seven years make a gift that has Inheritance Tax to be paid on it, the amount of tax owed depends on when the gift was given:

  • Gifts given in the three years before your death are taxed at 40%.
  • Gifts given between three to seven years before your death are taxed on a variable scale called “taper relief”. 

Taper relief is only applicable if the total value of gifts made within the seven years before your death exceeds the £325,000 IHT threshold.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

IHT thresholds depend on your individual circumstances and may change in the future.


Trusts can also be used to potentially mitigate any IHT liability you may have when you die.

They work by transferring your (the trustee’s) assets out of your name and into a trust, ready to be inherited by your loved ones (the beneficiaries) on your death.

Under some circumstances, placing the assets in a trust takes them outside your estate – potentially making them exempt from IHT.

Using a trust could also help you to avoid gifting sensitive assets, like property, to a beneficiary when they’re too young to responsibly manage it. You can decide on a specific age for beneficiaries to receive the assets in the trust.

It’s worth remembering that you, as the trustee, have the legal duty of managing the assets until your death.

The Financial Conduct Authority does not regulate trust advice.


Pensions can be a very useful, tax-efficient way of saving while you’re alive. Additionally, they can be a tax-efficient way to pass on wealth when you die.

Depending on which type of pension you may have, your pension is normally regarded as being outside your estate. Some flexible pensions may allow you to pass on your pension to your beneficiaries without incurring any tax if you die before the age of 75. 

After then, your beneficiaries may have to pay Income Tax on any funds they withdraw from your pension. 

Seeking help from a professional financial planner

To remove a lot of the confusion you may have surrounding your IHT liability, or to benefit from putting an estate plan in place that mitigates the amount of IHT your loved ones will pay, you may consider getting advice from a financial planner.

With their help, you could create an intergenerational wealth plan that ensures you can leave the legacy you want without paying more IHT than you need to.

Get in touch

At Investment Sense, we can help you manage your finances in order to mitigate any IHT liability you may face and preserve the value of your estate for your family. 

Please contact us via email info@investmentsense.co.uk or call 0115 933 8433.

Please note

This article is for information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.

Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. 

No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. 

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change, and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.