Inheritance Tax UK: 7 Ways to Legally Reduce Your IHT Bill

Inheritance Tax (IHT) is charged at 40% on estates over £325,000. With property prices where they are, millions of families are now affected. Here's how to reduce the bill legally.

Your IHT Allowances

Everyone gets a £325,000 nil rate band — the first £325,000 of your estate is tax-free. If you leave your home to direct descendants (children or grandchildren), you get an additional £175,000 residence nil rate band. For a couple, this means up to £1 million can pass tax-free.

1. Use Both Nil Rate Bands

If the first spouse to die leaves everything to the surviving spouse, both nil rate bands transfer. This means the surviving spouse has a combined allowance of £650,000 (or £1 million including residence nil rate bands). This happens automatically for married couples.

2. Give Gifts During Your Lifetime

You can give away £3,000 per year completely IHT-free (and carry forward one year if unused). You can also give unlimited gifts of up to £250 per person, and wedding gifts up to £5,000 for children, £2,500 for grandchildren, or £1,000 for anyone else.

3. The 7-Year Rule

Gifts above annual exemptions become "potentially exempt transfers." If you survive 7 years after making the gift, it's completely outside your estate. The tax reduces on a sliding scale (taper relief) from year 3 onwards.

4. Gifts from Normal Expenditure

This is an underused exemption. Regular gifts made from your surplus income (not capital) are immediately exempt from IHT — no 7-year wait. Examples include paying a grandchild's school fees, regular contributions to a family member's ISA, or monthly payments to anyone, provided they come from income you don't need.

5. Business Property Relief

Shares in qualifying unquoted businesses (including AIM-listed shares) can attract 100% relief from IHT after holding for 2 years. This is a powerful planning tool but comes with investment risk.

6. Life Insurance in Trust

Take out a life insurance policy written in trust to cover your expected IHT bill. The payout goes directly to beneficiaries outside your estate, providing the cash to pay the IHT without selling assets.

7. Charitable Giving

Leaving 10% or more of your net estate to charity reduces the IHT rate from 40% to 36% on the remainder. Depending on estate size, this can mean more money goes to your family, not less.