Ways to legally reduce your Inheritance Tax bill
Understand how 'gifting' can help to cut the costs
While only around 6% of estates are liable to pay Inheritance Tax, if you're likely to be one of them, there are ways to plan ahead to legally reduce the bill. This guide talks you through how you can use 'gifting' as a way to pass on some of your money while you're still alive – and the rules you need to know
With thanks to Dr Robin Keyte for sense-checking this guide.
Few estates pay Inheritance Tax – will you?
Inheritance Tax (IHT) is a tax on the 'estate' of someone who's died – yet in reality very few have to pay it. In fact, only roughly 6% of estates end up being liable for Inheritance Tax.
Your estate includes any assets you have when you die (such as property, savings, investments, businesses, vehicles, payouts from life insurance policies and so on), minus any debts.
However, everyone has a basic allowance of £325,000 that's free from IHT – and that allowance increases to £500,000 if you're passing on your home to a child or grandchild. So if your estate is worth less than this, there won't be any IHT to pay. Anything above these allowances will generally be taxed at an IHT rate of 40%.
In addition to the above allowances, anything you leave to a spouse (husband, wife, civil partner) is free of IHT. And as you can inherit your spouse's unused IHT allowance – for married/civil-partnered couples it's possible to have an allowance of up to £1 million that's free from IHT. Do note, these extra perks do NOT apply to couples who aren't married or in a civil partnership.
If you're not sure whether your estate will be liable for IHT, our main Inheritance Tax guide can help you work out whether it's likely.
If you have a larger estate that's likely to be liable to IHT, gifting rules allow you to pass on specific amounts of money while you are alive that will then be outside your estate – we talk you through the options below.
For guidance on what to include when working out the value of someone's estate, there's a handy list on Gov.uk (it also has a calculator that can give you an approximate total value.)
Likely to pay Inheritance Tax? Gifting can cut the bill
If you're in the minority who are likely to see IHT charged on their estate, there are ways of legally reducing the bill.
Specifically, this involves giving away money – or 'gifts' – during your lifetime. Doing this can reduce the total value of your estate, meaning IHT is charged on a smaller value (reducing any potential IHT bill as a result).
Where you're planning on making gifts during your lifetime, it's worth familiarising yourself with the rules. To do this, we've separated gifting into two distinct categories:
Your annual gift allowance: how much you can 'gift' each year without worrying about IHT.
Gifts that are subject to the seven-year-rule: 'gifts' that could count for IHT purposes if you die within seven years of giving them.
Before we go any further though, it's worth clarifying the following:
A gift must be a genuine, unconditional gift that you will not gain from. It's something given to someone without any reservation: no nods, winks or mutual backscratching.
So while gifts can be a valid way to reduce your Inheritance Tax bill, if any are given conditionally (barring a wedding gift), with the intention of receiving something in return, they could still be liable for IHT.
The biggest asset most people have is their home, yet trying to give this to your children won't work if you continue to live in it (unless you pay market rent to them for it).
See Gov.uk for more information on what exactly constitutes a gift.
Gifting 1. Your annual tax-free gift allowance
Each tax year, you are able to give away a certain amount of money or possessions tax-free (your annual tax-free gift allowance). Gifts that fall into this category aren't affected by IHT.
Annual tax-free gifts are separate to seven-year Inheritance Tax rule gifts – that means annual gifting is in addition to any gifting you do that's subject to the seven-year rule.
Full information about your annual gift allowance be found on Gov.uk, but in brief here are your yearly allowances:
Allowance 1: Give away £3,000 (annual exemption)
The first £3,000 you give away each tax year does not form part of your estate.
If you don't use your full annual exemption in any given year, the remainder can be carried forward to the next tax year (but no further). For example, if you didn't use any of your annual exemption in 2025-26, you could carry over that tax year's allowance and give away a total of £6,000 tax-free in 2026-27 (so £3,000 from 2025-26 and £3,000 from 2026-27).
The annual exemption can be used entirely on one person or split between multiple people (for example, you might give £1,000 each to three different people).
Allowance 2: Give £250 to anybody/everybody you know
Gifts of up to £250 per person each year are not subject to IHT. So, say you have 12 grandchildren, you could gift each of them £250 a year as a birthday present.
These gifts do not count towards the £3,000 annual gift exemption (described above) – though you can't combine gifts on the same person. So if you've already gifted someone your £3,000 annual exemption, you couldn't then gift them £250.
Allowance 3: Give wedding gifts (up to a limit)
If a family member or friend is getting married, you're able to gift them money tax-free. You can only make a wedding gift to that person once a year, and there's a limit on how much you can give them: £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else.
You can though make wedding gifts to different people in the same tax year. For example, if you had two children, both who are getting married in the same tax year, you could give each of them up to £5,000 (so up to £10,000 in total). Or if you had multiple friends getting married in the same tax year, you could give each of them up to £1,000.
Wedding gifts can be combined with your £3,000 annual exemption (so both allowances can be used on the same person in the same tax year) but not with the £250 small gift allowance.
Allowance 4: Give money freely from your income (as long as it doesn't affect your lifestyle)
IHT is a tax on your assets. And as a regular income (such as that from earnings, pensions and dividends) is not treated as an asset, you can regularly give money away from this income – tax-free – so long as it's not detrimental to your lifestyle.
There's no limit on how much money you can give tax-free, so long as:
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You can afford the payments after meeting your usual living costs.
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You pay from your regular monthly income.
Reasons for giving money out of your regular income can include (though isn't limited to):
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Paying rent for your child.
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Paying into a savings account for a child under 18 (though this could mean you end up paying tax on any savings interest accrued, unless you're saving into a junior ISA or Premium Bonds).
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Giving financial support to an elderly relative.
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Contributing to your child's living costs and tuition fees at university.
Giving money in this way can be combined with your £3,000 annual exemption (so it can be used on the same person), but not with the £250 small gift allowance.
Any money you give from your regular income must follow an established pattern though – for example, regularly paying the rent of a grandchild – and it can't compromise your own living standards. The rules for this type of IHT exemption are complex, so if you plan to give money in this way, it's a good idea to get independent financial advice.
Quick question:
Making regular gifts from your income is only tax-free if the gifting doesn't impact your own standard of living. In other words, the gifting should only be made from your 'surplus' income.
To identify surplus income, you should calculate all the income you receive in one year and minus all expenses (mortgage, bills, vehicle-running costs, insurance, etc). If there's anything left over, that can be considered your surplus income. That surplus income is the maximum from which you could give away regularly tax-free.
You should seriously consider writing down the calculations you've used to determine your surplus income and keep the evidence – that'll make life considerably easier for your loved ones/executor of your estate when it comes to them making a claim to HMRC that this type of gifting came out of your surplus income. Do the calculations each year and keep the evidence each time, as it's likely your amount of surplus income will change over time.
To get a flavour for the type of calculations you should keep record of, see page 8 of this IHT403 form.
Remember, for this type of gifting to be tax-free, you also need to have the intention of doing it regularly (so ideally, gifting from surplus income at least once a year).
How much can I give away from my regular income?
Allowance 5: Give to charities with no limit
Donations or gifts to charity are not subject to IHT. And where a charity donation is equivalent to at least 10% of your estate, any IHT payable elsewhere is reduced to 36%.
Gifting 2. Gifts subject to the 'seven-year rule'
Separate to the annual gift allowance described above, the other way of using gifting to reduce your IHT bill is through the 'seven-year rule'.
Remember that seven-year rule gifting can be used in combination with your annual gifting allowance. So taking advantage of one doesn't mean you then can't use the other (and your annual gifting allowance won't reduce because you're also using seven-year gifting).
In simple terms, the seven-year rule works like this:
Any gifts given more than SEVEN YEARS before your death ARE NOT liable for Inheritance Tax
In other words, if you give away a gift during your lifetime (which isn't part of your annual allowance) and live for another seven years or more, then this gift won't count towards your £325,000 IHT allowance.
But gifts given in the seven years prior to your death will count towards your £325,000 IHT allowance.
IMPORTANT: Do note this chapter on the seven-year rule does not relate to trusts, where the rules around Inheritance Tax become much more complicated. If a trust is relevant to you, it's best to seek financial advice.
How the seven-year rule works
IHT will be due on gifts given away less than seven years before you die if the following apply:
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The gifts do not form part of your annual gift allowance.
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The gifts amount to more than £325,000 (your IHT-free allowance).
IHT will be charged on the portion of the gifts that is above £325,000. This is on a sliding scale up to a maximum of 40% – as the table below shows.
Years between gift and death | Rate of Inheritance Tax |
|---|---|
Less than 3 years | 40% |
3 to 4 years | 32% |
4 to 5 years | 24% |
5 to 6 years | 16% |
6 to 7 years | 8% |
7+ years | 0% |
Here's an example of how it works in practice:
Sally Saver isn't married or in a civil partnership when she dies. In the nine years before her death, she gave away three significant sums of money:
£50,000 to her brother, nine years ago.
£325,000 to her sister, four years ago.
£100,000 to a friend, three years ago.
There's no Inheritance Tax to pay on the £50,000 gifted to her brother, as it was given more than seven years ago. Likewise, there isn't any to pay on the £325,000 she gave to her sister, as this is covered by the Inheritance Tax allowance.
But her friend (not the estate) must pay Inheritance Tax on the £100,000 given to them, at a rate of 32%, as this was given by Sally after she'd breached the Inheritance Tax threshold. The Inheritance Tax due on this gift is therefore £32,000.
At the time of her death, Sally's remaining estate was valued at £400,000. As there is no Inheritance Tax-free allowance left to use (it all went on the gifts), Inheritance Tax on the remaining estate would be due (at 40%). This would be equivalent to £160,000.
Important. Be aware if you make a gift which isn't money – such as property, shares or other investments – in the seven years prior to your death there may be Capital Gains Tax to pay as well as IHT. Therefore, if you're considering making non-monetary gifts, you should seek sound financial advice first.
Who has to pay the IHT due on a gift?
Normally IHT is deducted from the value of an estate and paid to HMRC before what's left is passed on to the deceased's beneficiaries. This process is sorted out by the executor/administrator of the deceased's estate.
But where IHT is due on a gift specifically, then it's the person given the gift who pays IHT. Either way, you'll likely need to liaise with the estate's executor/administrator to work out exactly how much IHT is due.
Be aware IHT bills need paying by the end of the sixth month after the deceased has died. So if they died in January, the bill would need to be settled by the end of July.
More information about when IHT is due and how to pay it can be found on Gov.uk.
Inheritance tax is a complex topic, but MSE's founder & chair has got it covered, via his spin-off BBC Not The Martin Lewis Podcast, where he explains the main rules and takes on subjects he doesn't cover, by putting your questions to a team of specialists.
Listen to 'Inheritance Tax' for free via:
BBC Sounds | Apple | Spotify
Pensions can be passed on – many tax-free
If you've got a pension, then often this can be passed on if there's money left in the pot at the time you die.
Currently, pensions are not subject to IHT, as they do not form part of your estate. And as some people don't pay income tax on an inherited pension, this means inheriting a pension can be completely tax free in some cases.
However, it's important to note that these rules are set to change. From the 2027/28 tax year, pensions will start to form part of an estate – meaning pensions will be subject to IHT rules from 6 April 2027.
In reality though, only a small number of pensions will actually be hit with IHT as a result of this change (the number is estimated to be in the 10,000s). The vast majority of pensions will continue to be unaffected by IHT, and many will continue to be inherited tax-free.
For more on how passing on a pension works, see our guide on Inheriting a pension.
Inheritance tax gifting FAQs
There are different types of trusts out there and often they're subject to different rules when it comes to IHT.
Depending on the type of trust you open, it might be possible to reduce how much IHT you need to pay or eliminate the bill entirely – the primary reason because anything placed into a trust normally removes it from your 'estate'.
Yet often IHT is still required to be paid somewhere down the line and it might be that other types of tax need to be paid.
This is where IHT planning can get very complex, so if you're thinking about setting up a trust it's really important to seek specialist advice from a financial advisor.
Yes, there are insurance policies available which cover your beneficiaries in the event they have to pay IHT on a gift received from you (in other words, if you die within seven years of making the gift). Examples of this type of insurance include 'gift inter vivos', whole of life assurance, and guaranteed premium level term assurance.
However, insurance policies like these should be arranged in such a way that they don't inflate the value of your estate (and any associated IHT bill).
This is a very complex area, so you would need to seek specialist advice from a financial advisor.
Can putting money and assets into a trust reduce IHT?
Is there insurance which covers IHT?
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