How to Avoid Inheritance Tax

Use Your Annual Gift Allowance

You can give away £3,000 per tax year without it counting towards your estate. This is called the annual exemption.¹

If you didn't use last year's allowance, you can carry it forward one year, giving you £6,000 to gift this year. After that, unused allowances expire.

You can also give:

• £250 to any number of people (as long as you haven't used another exemption for them)
• £5,000 to a child getting married (£2,500 to a grandchild, £1,000 to anyone else)
• Regular gifts from income (not capital) if they don't affect your standard of living

These are immediately exempt. No seven-year wait.

The Seven-Year Rule

Gifts above the annual exemptions are potentially exempt transfers (PETs). They become fully exempt if you survive seven years after making the gift.²

If you die within seven years, the gift is added back to your estate for IHT purposes. Taper relief reduces the tax if you survive at least three years:

Start gifting early. A £500,000 gift made at age 60 is fully exempt if you live to 67.

Leave 10% to Charity

If you leave at least 10% of your net estate to charity, the IHT rate on the rest drops from 40% to 36%.³

Example: Your estate is worth £1 million. Your nil-rate band is £500,000, leaving £500,000 taxable.

• Without charity: £500,000 × 40% = £200,000 IHT
• With 10% to charity: £100,000 to charity + (£400,000 × 36%) = £100,000 + £144,000 = £244,000 total. Net to beneficiaries: £756,000 (vs £800,000 without charity)

The charity gets £100,000 and your beneficiaries get £756,000 instead of £800,000. You've redirected £44,000 from HMRC to charity and your beneficiaries lose £44,000. Whether this is worthwhile depends on your priorities.

Put Life Insurance in Trust

Life insurance payouts are added to your estate for IHT unless the policy is written in trust. If you put the policy in trust, the payout goes directly to your beneficiaries and bypasses your estate.⁴

This is especially useful if you're using life insurance to cover an IHT bill. Without a trust, the payout itself would be taxed at 40%.

Setting up a trust is straightforward. Most life insurers provide a free trust deed when you take out the policy.

Business Property Relief and Agricultural Property Relief

If you own a trading business or agricultural property, you may get 50% or 100% relief from IHT.⁵

Business Property Relief (BPR):

• 100% relief on unquoted trading company shares (including AIM-listed)
• 100% relief on a business or interest in a business (e.g. partnership)
• 50% relief on quoted shares you control

You must have owned the business for at least two years before you die. Investment businesses (property rental, stock trading) don't qualify.

Agricultural Property Relief (APR):

• 100% relief on agricultural property you occupy and farm yourself
• 50% relief on agricultural property you own but let to a tenant

This has led to wealthy individuals buying farmland and AIM shares as IHT shelters. HMRC scrutinises these arrangements closely.

Spend It

The simplest way to avoid IHT is to reduce your estate by spending the money while you're alive. Holidays, home improvements, helping family members with house deposits, paying for grandchildren's education.

There's no IHT on money you've already spent. This is psychologically hard for people who've spent a lifetime saving, but it's the most straightforward approach.

What About Trusts?

Trusts can reduce IHT but they're complex and have their own tax rules. Discretionary trusts face an immediate 20% IHT charge on amounts over the nil-rate band, plus periodic charges every 10 years.

Trusts are useful for:

• Protecting assets for vulnerable beneficiaries
• Controlling how and when beneficiaries receive money
• Sheltering life insurance payouts

They're not a magic bullet for IHT. Get specialist legal and tax advice before setting one up.