How Can I Reduce My Inheritance Tax (IHT) Bill?

The IHT is a tax imposed on the assets left by a deceased individual. In the UK, it is applicable to the estate’s value exceeding the tax-exempt limit, and the current tax rate stands at 40% for estates surpassing £325,000. Nonetheless, it is feasible to decrease the IHT payment through effective planning. This write-up will highlight various approaches to minimize your inheritance tax expenses in the UK.

1. Make use of your annual exemptions

In the United Kingdom, everyone is allowed to give up to £3,000 worth of gifts each tax year without it affecting the value of their estate. This is known as the annual exemption. If this amount is not used, it can be carried over to the following year, but only for one year. Furthermore, there is a separate allowance of £250 that can be gifted to multiple individuals annually without it being included in the estate’s value.

2. Use your spouse or civil partner's allowance

Individuals who are married or in a civil partnership have the ability to transfer assets to their significant other without incurring taxes. This is commonly referred to as the spouse or civil partner’s exemption. If one’s estate is valued below the tax-free threshold of £325,000, they have the option to move any unused allowance to their spouse or partner. Consequently, the tax-free threshold can potentially increase to £650,000 for married couples or civil partners.

3. Give away assets to reduce the value of your estate

One way to decrease your liability for IHT is by transferring assets to others or charities while you’re alive. This can be done without incurring taxes, but only if you live for at least seven years after the transfer takes place. If you happen to pass away before the seven years are up, the asset will be included in the estate’s value and may be subject to IHT. However, if you pass away between three and seven years after the transfer, a lower IHT rate may apply.

4. Use trusts to protect your assets

Trusts are a legal mechanism that allows assets to be held for the benefit of specific beneficiaries. When assets are placed in a trust, it can decrease the value of one’s estate and potentially reduce the liability for inheritance tax. There are different kinds of trusts that are suitable for different situations, and selecting the right one will depend on personal circumstances. Because trusts can be complicated, it is advisable to seek guidance from a professional prior to establishing one.

5. Make use of business relief

As a business owner, you can potentially receive business relief to reduce the amount of Inheritance Tax (IHT) you owe based on the value of your business. The rate of relief, either 100% or 50%, depends on the business type and situation. If your business qualifies for the 100% rate, its value will be entirely exempt from IHT. If it qualifies for the 50% rate, its value will be reduced by half when determining your IHT liability.

6. Invest in AIM shares

One can use investing in shares on the Alternative Investment Market (AIM) as a means of lowering their IHT responsibility. AIM shares are shares in smaller, developing companies that have been listed on the Alternative Investment Market of the London Stock Exchange. If you own shares in qualifying AIM businesses for a minimum of two years and hold them until death, they will be exempt from IHT.

7. Use life insurance

The use of life insurance is to offer a one-time payment to those you designate as beneficiaries after you pass away. The payment is typically exempt from taxes, which implies it won’t be subjected to IHT. The payments made towards the insurance policy cannot be subtracted from your IHT obligation, however, the payout can help lessen your total IHT obligation. The reason being the payout could be utilized to offset any IHT responsibility that emerges, providing your beneficiaries with the full value of your estate.

Different kinds of life insurance plans exist, and the best one for your situation will vary. It’s crucial to make certain that the policy is established in trust, so that the money goes straight to your chosen beneficiaries and isn’t included in your estate for inheritance tax objectives.

8. Consider charitable giving

To minimize your IHT responsibility, you can consider donating to charity in your last will and testament. Such donations are not subject to IHT, thus reducing the assessed value of your estate and possibly lowering your IHT obligation. Furthermore, if you donate at least 10% of your estate to charity, the IHT rate for the remaining portion of your estate may be lowered from 40% to 36%.

9. Seek professional advice

Minimizing your liability for Inheritance Tax (IHT) can be difficult, with multiple approaches to consider. It’s crucial to consult a certified tax consultant or financial planner to ensure you’re taking advantage of all viable options. They can assist you in devising a personalized plan that takes into account your unique circumstances and goals.


To summarize, minimizing the amount of Inheritance Tax (IHT) you need to pay in the UK can be accomplished by meticulous preparation and utilizing different methods. These methods include taking advantage of yearly exemptions, utilizing your partner’s or spouse’s allowance, donating assets, establishing trusts, obtaining business relief, investing in AIM shares, obtaining life insurance, considering charitable donations, and consulting with experts. By taking measures to decrease your IHT, you can guarantee that your inheritors receive the most significant conceivable value from your estate.

How YRF Accountants can help you?

For more advice on reducing your IHT, speak to our Estate Planning experts at YRF Accountants who can help with efficient IHT tax planning.

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