Nobody likes to think too much about what happens after they’re gone. But here’s a thought: “When I pass away, do I want a big chunk of my life’s savings to go to the taxman, or to my loved ones and causes I care about?” For most of us, the answer is easy, we want our money to benefit our family, friends, or charities, not be gobbled up by inheritance tax. The UK’s inheritance tax rules can see 40% of what you leave behind, above certain allowances, lost to tax. The good news however, is that with a bit of smart estate planning, you can dramatically reduce that tax liability. In this article, we’ll walk through practical steps to ensure you leave a legacy, not a large tax bill. It’s about being thoughtful now so that more of your hard-earned wealth goes exactly where you want it to.
Let’s start with a quick refresher on the UK’s inheritance tax basics. Each individual can pass on a certain amount tax-free, this is the nil-rate band, currently £325,000. On top of that, there’s a residence nil-rate band (if you leave your main home to direct descendants) of up to £175,000. Simplifying a bit, a married couple could potentially pass on £1 million tax-free if they use both allowances fully. Anything above the allowances is generally taxed at 40%. So if, for example, a widowed person dies with an estate worth £1,300,000 (and they had the full £500,000 allowance plus the £500,000 of their late spouse’s unused bands), the extra £300k would be taxed at 40%, meaning £120k to HMRC. That’s a lot of money that could have gone to family or others.
Now, up to £500,000 of allowances per person may sound high, however as property and asset values have risen and pensions are to be included in the calculation from 2027, more “normal” families have been, and will be, dragged into the inheritance tax net. So even if you don’t consider yourself “wealthy,” your estate could face inheritance tax, and a little planning makes a big difference.
So, how do we reduce that potential 40% hit? Here are some key strategies:
1. Write (or Update) Your Will – and Use It Wisely:
A will is the foundation of any estate plan. Dying without one (intestate) means the law dictates who gets what, which may not align with your wishes and can’t incorporate any tax planning. At the very least, your Will can make sure your current wishes are respected, especially if your family situation has changed (marriages, divorces, new grandchildren, etc.). A Will can also specify things like giving your house or a share of it directly to kids to use the residence band, etc. And crucially, if you want to leave money to charity, note that not only is charitable giving inheritance tax-free, but if you leave at least 10% of your net estate to charity, your inheritance tax rate on the rest drops to 36%. So wills are powerful documents for both legacy and tax.
2. Spend and Enjoy – But Plan for Your Own Security:
While much of estate planning focuses on passing wealth to others, one of the simplest ways to reduce a future inheritance tax bill is to spend more of your money during your lifetime. After all, money you use to enjoy life, whether that’s travel, hobbies, home improvements, or supporting loved ones while you’re alive, won’t be subject to inheritance tax when you’re gone.
However, this approach comes with a crucial caveat: you must be confident that your spending won’t jeopardise your own financial security. It’s essential to ensure you have enough to cover your needs for the rest of your life, including unexpected expenses such as care costs, medical bills, or changes in living circumstances.
3. Give Gifts During Your Lifetime:
Another simple but effective way to reduce a future inheritance tax bill is to give some of your wealth away while you’re alive. There are rules and allowances that make this effective:
- You can give £3,000 per year in total (to one person or split among several) that’s immediately exempt from inheritance tax. If you didn’t use last year’s £3k, you can carry it forward one year, potentially giving £6k at once.
- Small gifts: You can give up to £250 to any number of individuals per year, completely inheritance tax-free, as long as you haven’t used another allowance on the same person.
- Gifts from income: This one is often overlooked. If you have surplus income, you can gift that excess regularly and it’s exempt from inheritance tax, as long as it doesn’t affect your standard of living. This means, for example, if each year you have £5,000 of income you don’t need, you could gift it to children annually, none of those gifts would count towards inheritance tax at all. It’s a great way to pass on wealth gradually.
- Special occasion gifts: Weddings or civil partnership gifts – you can give £5,000 to a child for their wedding, £2,500 to a grandchild, or £1,000 to anyone, tax-free.
- The 7-year rule: Outside the above allowances, larger gifts you make directly to beneficiaries or into a trust, will be exempt from inheritance tax if you survive 7 years after making them. (There’s a sliding scale reduction if you survive 3-7 years, called taper relief, but in practice that only helps on gifts over the nil-rate band). So, if you have significant assets you know you won’t need, the earlier you can comfortably give them to your heirs, the better. Some people are hesitant “what if I need it later?” That’s understandable. You can strike a balance, maybe giving away part of an asset or using something like a trust to retain some control or access to capital at future points.
- Keep records of any large gifts (date, amount, recipient). This will help your executors and avoid confusion with HMRC later.
4. Use Trusts:
Trusts can be useful, especially if you want to give assets but still have some control over who gets what and when or if you need to protect beneficiaries (like young children or spendthrift family members). There are different types (such as bare trusts and discretionary trusts) with different implications, so it’s important to get advice on these if you think it might be the right option for you.
An ever more common trust, following recent and upcoming changes to the inheritance tax rules and pensions, is a Revisionary Trust, sometimes called a flexible reversionary trust. This offers a unique blend of inheritance tax efficiency and flexibility as you can gift money into the trust and retain the option to receive scheduled capital payments at fixed points in the future. If you don’t need the money when a payment is due, you can defer or forgo it, allowing the funds to remain in trust for your beneficiaries. This means you can plan for your own future needs, such as care costs or unexpected expenses, without making an irrevocable decision to give up access to your capital.
5. Life Insurance:
If you anticipate a sizable inheritance tax bill and aren’t able to reduce it fully, you could take out a life insurance policy specifically to cover the tax. The cover, upon your death, would pay out a sum roughly equal to your expected inheritance tax. If written in trust, you don’t need to wait for probate and it wouldn’t be added to the estate avoiding further inflating your tax liability. The funds on death goes directly to your heirs, who can then use that money to pay the tax, preventing a forced sale of assets. This doesn’t reduce the tax, but it softens the impact on your heirs (they get your assets as intended, and the insurance essentially foots the tax bill, in exchange for the premiums you paid).
6. Think About Your Pensions in Estate Planning:
Pensions have been a bit of an inheritance tax loophole in the past, money in a defined contribution pension is usually outside your estate for inheritance tax. That’s why some very wealthy individuals use their pension as a way to pass on wealth (they live on other assets and let the pension grow, knowing it can go to kids inheritance tax-free). However, as we highlighted earlier, from April 2027, this advantage will disappear. Despite that, pensions remain a tax-efficient vehicle. If you die before age 75, beneficiaries can still take pension money without income tax or leave it to grow until they do need it tax free. Death after 75, will mean they potentially not only have an inheritance tax liability but will also pay income tax on withdrawals so some carful planning around this is required to ensure you do not pay more tax than you need to. Good practice is to ensure your pension has an up-to-date nomination (expression of wish) so the right people get it.
Also consider that you might want to use more of your pension (draw it down) during your lifetime, using this to fund expenditure and leave other assets such as ISA’s to your heirs. The interaction of taxes can get complex, but if the goal is to maximise what goes to loved ones net of all taxes, a financial adviser can help guide you on the most efficient strategy for you.
7. Plan for Property:
For many, the house is their biggest asset and a big contributor to inheritance tax. The residence nil-rate band helps if leaving to direct descendants, but there are conditions (like if your estate is over £2M, that extra allowance tapers away). Some consider downsizing or equity release as a way to both enjoy life and reduce inheritance tax (spending or gifting the proceeds).
Be mindful though: giving away a house while you still live in it doesn’t work (it’s a “gift with reservation of benefit” and HMRC will still count it in your estate unless you pay market rent to the new owner). So, if your plan was to put the house in kids’ names but keep living there rent-free, unfortunately that won’t avoid inheritance tax. Instead, perhaps downsize to a less expensive home and gift the difference in cash, or explore certain trust arrangements or insurance to cover the house’s inheritance tax. Some parents have their children move in and they move out, effectively giving the house (rare, but one way). Each option has trade-offs, so consider carefully.
8. Keep Reviewing Your Plan:
Laws change (as we see with pensions) and family circumstances change. Maybe you had set aside money for a grandchild’s education but then they got a scholarship; that money could be redirected. Maybe you initially left everything to your spouse (which is fine) but now realise both estates combined are more than you will need, so gifting earlier might help. Every few years, revisit your estate plan. Think about your legacy goals too beyond the taxes, are there specific bequests or messages you want to leave? Some write ethical wills or letters to family to accompany the estate. But from a practical view, make sure all your paperwork is in order: your Will signed and witnessed, a list of your assets and passwords somewhere secure and powers of attorney in place (not a direct inheritance tax thing, but vastly helpful if you lose capacity, and it can tie into gifting strategies if needed).
Estate Planning is About Love and Peace of Mind
You’re taking care of the people you care about, even when you’re not there. By planning ahead, you control the narrative: you decide who gets what and how much, rather than the default rules deciding. It can be incredibly satisfying to see the impact of your generosity while you’re alive (like helping a child buy a home) and know that you’re minimising headaches and costs for your family later.
Yes, these conversations and actions can be a bit uncomfortable; contemplating one’s mortality isn’t exactly fun. But think of it this way: it’s a final gift to your loved ones, removing burdens from their plate during what will be an emotional time. So, take the first step. Have the conversation with your spouse and advisers. Even implementing one or two of the strategies above can make a tremendous difference. In the end, a little planning can ensure your legacy is one of joy and benefit, not a hefty invoice from HMRC.
Leave behind memories, love, and security, not avoidable taxes. Your future heirs will thank you for it.
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