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5 Min. Read

How to Avoid Inheritance Tax in the UK: 4 Ways to Cut IHT

How to Avoid Inheritance Tax in the UK: 4 Ways to Cut IHT

No one likes thinking about the end. Unfortunately, though, we all have to kick the bucket sometime. As such, it’s important to plan for the future, normally done via estate planning. One of the things you have to have a plan for is all of your possessions. Who’s going to get them? How much will they be worth?

If you’re leaving things behind, then it’s important to understand Inheritance Tax. Keep reading to learn all of the fundamentals of Inheritance Tax, and how to reduce it in the UK!

Here’s What We’ll Cover:

What Is Inheritance Tax?

What Is a Taxable Estate?

What Are the Inheritance Tax Rates?

4 Ways to Cut Inheritance Tax

Seek Legal Advice from an Estate Planning Attorney

Key Takeaways

What Is Inheritance Tax?

Inheritance Tax is a tax on the estate of a deceased person. These estate taxes cover a number of things, including real estate, money, and possessions. Inheritance Taxes are something imposed on everyone, but not everyone has a taxable estate.

What Is a Taxable Estate?

Inheritance Tax doesn’t operate the same way that income taxes do. Not every person is subject to inheritance taxes. A person will only be subject to estate taxes should their estate meet the following criteria:

  • The estate’s value is more than £325,000 threshold
  • The estate is not left to your spouse, civil partner, or a community amateurs sports club

As you can see, most people don’t have to worry about estate taxes. However, it’s still required that estates that don’t meet the £325,000 be reported to Her Majesty’s Revenue and Customs authority.

What Are the Inheritance Tax Rates?

Inheritance tax rates are flat-rate. The current rate is 40%. This amount is only applied to any amount over the £325,000 threshold.

For example, if your estate is worth £400,000, you’ll be taxed on £75,000 of it. (£400,000 - £325,000 = £75,000)

Do Life Insurance Proceeds Fall Under the Inheritance Tax?

Yes, life insurance policies will fall under the Inheritance Tax, as they are something being left behind. While they aren’t subject to any other specific tax, they are subject to Inheritance Tax.

4 Ways to Cut Inheritance Tax

If you’re certain that your estate is going to be worth more than the threshold, there are ways to cut the tax. Here are the 4 best ways to cut Inheritance Tax for your loved ones.

1. Gift Giving

One of the easiest ways to cut Inheritance Tax is by giving gifts while you’re still alive. Giving gifts is a way to qualify for tax exemptions. However, for Inheritance Tax purposes, the gifts must be given outright. This means that you cannot continue to benefit from the gift.

An example of this is the transfer of ownership of your home. In the transfer of property, especially real estate property, you can no longer use it. If you transfer your home’s ownership to your children, you’ll have to move out of it to meet the gift-giving criteria. Ownership transfer has to be absolute.

Annual gifts receive an exemption of £3,000. If you didn’t use that last year, it rolls over, doubling it to £6,000. Additionally, gifts for weddings or civil ceremonies come with exemptions, as do small gifts. Small gifts are only exempt if you haven’t used another exemption on the same person that year.

2. Leave Money to Charity

One of the best ways to avoid Inheritance Tax is by leaving money to charity. Any amount of money you leave to qualified charities will be tax-exempt. This makes cutting Inheritance Tax easy. If your estate is worth £350,000, you can avoid tax simply by donating £30,000 to charity. This will reduce the size of your estate to under the threshold.

This also works when you set up a charitable trust. In most cases, once a trust has been set up, the money no longer belongs to you. This allows you to avoid Inheritance Tax.

3. Leave Everything to Your Spouse or Partner

When you leave all of your estate to your spouse or partner, you can avoid inheritance tax entirely. This is true for both married couples and civil union partners. This is the easiest way to avoid inheritance tax, should you have a living spouse or partner.

4. Leave the Real Estate to Your Children

If you leave your home to your children, you can avoid any estate tax that would be taken on it. This is due to a change in legislation that added £175,000 to the standard threshold of £325,000. This made it £500,000 in exemption, as long as you leave your home to your children. Then, no other parts of your estate can be taxed.

Seek Legal Advice from an Estate Planning Attorney

This isn’t one of the 4 tips so much as it is a recommendation. If you’re concerned about Inheritance Tax, it’s always a good idea to come up with estate plans with an estate planning attorney. These individuals are normally estate tax professionals and can help you make sure that you can cut as much IHT as possible.

Key Takeaways

If you’re concerned about your estate size and the way Inheritance Tax will affect it, have no fear. There are ways to cut the impact of IHT on your estate and your loved ones once you’ve passed on. The 4 methods listed here are all easy to follow and can be planned for well ahead of time.


If you’re looking for more tax-related articles, be sure to check out our resource hub! We have plenty of helpful guides for you there!


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