When someone passes away, the total value of their assets may be subject to inheritance tax if the value exceeds a certain minimum threshold set by the government. In 2025, the UK government states that the inheritance tax rate is 40%. If the value of your possessions is below the £325,000 threshold, known as the Nil Rate Band (NRB), they are not subject to taxation. However, if it exceeds, your estate is subject to taxation at a 40% tax rate.
Looking for a solution to reduce your IHT tax bill? This guide is designed to explain the top 7 most efficient ways to minimize your inheritance tax liability.
Pay Inheritance Tax: Understanding Nil Rate Band
Inheritance tax is a type of tax imposed on the estate of a deceased person or on the beneficiaries who receive assets from that estate. The standard inheritance tax rate is 40% for those whose estate is above £325,000. Plus, you can benefit from tax fee advantages if you leave anything above that amount to charities, community amateur sports clubs, your spouse, or civil partners.
There are exemptions, too. If you pass your property to your grandchildren or children, you can benefit from a tax-free allowance up to £500,000. For instance, you have an estate which is around £400,000. You transfer it to your children or grandchildren. In this case, you will benefit from the IHT exemption.
Considering these, how much inheritance tax do you think you can pay? Not much right. Therefore, inheritance tax planning should be carefully done. If not, your beneficiaries can get less than you expect, or you have to pay a lot of taxes while you are alive.
How to Avoid Inheritance Tax in the UK?
Before inheriting a large sum of money for your loved ones, you must be aware that there are some ways you can reduce inheritance tax liability.
1. Distribute Your Assets
If you wish to pass your money to your loved ones, you may be wondering how much of it can be passed on to them after taxation. Let’s assume that you have some money, which is around £350,000. You want to leave it to your kids or grandchildren. This money will be liable to taxation at a 40% tax rate.
However, if you make a will and distribute it among your kids and grandchildren before you pass away, it can help them avoid paying inheritance tax by putting the money below the IHT tax-free threshold.
2. Make Gifts
By gifting a value of your estate for inheritance Tax purposes, you can gradually reduce your tax bill. According to this, you can gift up to £3,000 for a given tax year. However, you can carry your unused annual exemption to the next tax year.
For instance, if you did not use the full £3,000 exemption in the previous tax year, you can carry over the unused amount to the current year, allowing you to gift up to £6,000 in total. This strategy helps reduce the value of your estate and the potential IHT liability.
If you want to make gifts for a wedding, you can send up to £5,000 as a parent, £2,5000 as grandparents, and £1,000 as anyone else. Moreover, you can make individual, smaller gifts up to £250 per person.
You can also make larger gifts; however, they are mostly considered as PETs, referring to a type of lifetime gift if the conditions are met. This is when the 7-Year Rule comes into place. Therefore, if you die in 7 years or more after giving a gift that is liable to inheritance taxation, it becomes tax-free. If you die sooner, the gift is subject to taxation according to the taper relief:
| Years between gift and death | Tax Rate |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
3. Transfer your estate to your spouse or civil partner
According to the Nil Rate Band, your estate can be subject to 40% inheritance tax if it exceeds £325,000. Here, you should know that if you transfer your estate to your spouse or civil partner, you can avoid inheritance tax altogether.
Additionally, the unused part of the estate can be transferred to you if your spouse or civil partner dies before you. This highlights that you may pay inheritance tax. For example, you have a £600,000 estate. Then, you leave £300,000 of your estate to your spouse. In this circumstance, if they die before you, you will get a total amount of £600,000.
However, if they use the transferred amount for kids or anything else, you can only get what’s left behind. For instance, they spend £275,000, and the remaining £25,000 will be added to your estate. The total amount you will hold is £325,000, which puts you below the Nil Rate Band.
4. Consider giving to charity to reduce your IHT Bill
If you gift your money to charities, community amateur sports clubs, or political parties, your estate will not be subject to taxation. Here, the trick is that leaving 10% of your total assets to a charity can reduce your tax rate up to 36%.
5. Think about taking a retirement interest-only mortgage
Similar to a lifetime mortgage, a retirement interest-only mortgage is an alternative to equity release that is paid off when someone dies, moves into long-term care, or the property is sold. This can be mostly preferred by those who have a large estate for inheritance tax purposes. By taking a retirement interest-only mortgage, they can reduce the amount they are liable for inheritance taxation.
6. Use trust to avoid inheritance tax to reduce your inheritance tax bill
Using trusts is a way to use your estate for IHT purposes. This refers to giving someone your assets to take them out of your estate. Thereby, you can reduce your tax bills or even avoid inheritance tax. Although the money is no longer yours, you can limit how and when it can be used.
However, you must be aware that if your underlying asset generates any type of income (rental or sold), you can expect to encounter income tax implications.
7. Passing your home to your beneficiaries
If you question whether to avoid paying inheritance tax on property or not, you can find the answer by passing your property to your beneficiaries. You can reduce the amount of inheritance tax payable by passing your property to your children or grandchildren (direct relations only). At this step, you can benefit from the main residence nil rate band. This includes £175,000 per person in 2025 in addition to the inheritance tax band. Plus, it applies to you if your estate is worth less than £2 million.
Considering this, with the current inheritance tax allowance up to £325,000, a single person can get tax exemption up to £500,000, while married couples or civil partners can save up to £1 million.
Who actually pays Inheritance Tax to HMRC?
It is mostly the executor (the person sorting out your estate), not the people who inherit. The tax is taken from the money and property in your estate before anything is passed on. Beneficiaries usually do not pay tax just for inheriting, but they might pay other taxes later.
For example, if they rent out a house they were left. Plus, due to the 7-year rule, gifts you gave away before you died could also be taxed if they were large and you died within 7 years of giving them.
FAQ on How to Avoid Inheritance Tax
How can I legally avoid inheritance tax?
Yes, you can avoid it through a carefully crafted IHT planning. At this step, you can consult an independent financial adviser.
Can I put my house in my children’s name to avoid inheritance tax?
Yes, you can gift your property to your children, but if you continue living there without paying rent, it might still be taxed for Inheritance Tax. To avoid this, you need to survive for seven years after gifting the house and stop benefiting from it.
How much can I inherit from your parents without paying taxes in the UK?
Basically, you can inherit up to £325,000. If it exceeds this amount, you may need to pay 40% tax on anything above the threshold. However, there are some important tax-free allowances. If your parents leave their home to you, the threshold can increase by up to £175,000 each. For married couples or civil partners, their allowances can be combined, meaning up to £1 million could be passed on tax-free.
