How to Mitigate Inheritance Tax

How to Mitigate Inheritance Tax

How to Mitigate Inheritance Tax

As they say, there are only two certainties in life, taxes and death – when it comes to inheritance tax, tax on death. However, there are legitimate ways to mitigate potential inheritance tax charges in the future, maximising assets left to your family and friends while minimising your tax liability. Before we look at ways to reduce your inheritance tax, we will examine the history of inheritance tax and the current allowance.


Modern-day inheritance tax

Many people will be surprised to learn that modern-day inheritance tax dates back to 1894 when it replaced several different inheritance taxes (death duties), which went as far back as 1796. The current inheritance tax nil rate band (inheritance tax allowance), standing at £325,000, has been unmoved since April 2009. Considering that the average home in the UK is now valued in excess of £280,000 when adding investments, additional property and other assets, many estates will exceed the current allowance. 


How to reduce your inheritance tax

There are numerous ways in which you can reduce your inheritance tax liability, which, in isolation, may seem relatively small, but the cumulative impact can be significant.


Gifting while alive

There are several ways in which you can gift money or assets to individuals as a means of reducing future inheritance tax. These include:


Annual exemption – you can give away £3000 worth of gifts each year without incurring any tax.


Wedding/civil ceremony gifts – in addition to your annual exemption, you can also give gifts worth up to £1000 per person, up to £2500 for a grandchild or great-grandchild and as high as £5000 for a child.


Small gifts exemption – you can also give away unlimited gifts up to £250 per person per tax year, as long as no other allowance has been used on the individual.

In some cases, gifts above and beyond the traditional exemptions may be brought back into your estate if you die within seven years. This was introduced to catch those looking to gift assets before their death to avoid inheritance tax.


Pension assets

Traditionally, pension assets are held in trust, which means they are usually exempt from your estate upon death. Considering that the pension contribution allowance was recently increased from £40,000-£60,000 a year, assets held in a pension could be significant over 40 years. Unfortunately, the only downside is that you cannot access the funds until retirement. As well as income tax benefits, all gains within a pension scheme are free of capital gains.


Leaving assets to your partner

The transfer of assets between married couples or those in a civil partnership is exempt from inheritance tax. Your partner would also inherit any unused inheritance tax allowance upon your death which they can use to offset against their estate on death. In theory, your partner could have a £650,000 inheritance tax allowance upon death. However, the assets they previously inherited, exempt from inheritance tax, would count towards their final estate.


Leaving your house to your children

In April 2017, the UK government brought in an additional allowance for those looking to leave their home to their children. If you decide to leave your home to your children, stepchildren or grandchildren, this will unlock an additional £175,000 tax allowance on top of the traditional £325,000 allowance.

Theoretically, if you were to leave your entire estate to your partner on death, including your home, your partner could be left with a combined inheritance tax allowance of £1 million. This would consist of their £325,000 allowance, an additional £175,000 if the home was left to their children, and the same allowances inherited on your death. It is worth taking advice!



You can reduce your inheritance tax bill in numerous ways, ensuring that maximum assets are passed to your beneficiaries upon your death. Alternatively, some people take out life insurance to cover any inheritance tax liability – as this is held in trust, it isn’t normally deemed part of your estate. However, it can be relatively complex in some areas, and it is essential to take advice.

As we mentioned earlier, in isolation, many of these allowances may seem relatively small, but the cumulative impact over the long term can be significant.