The death tax is dubbed Britain’s most hated tax, but only around one in 20 estates pay it. Those numbers are rising, along with the amount of money HMRC is raking in each year. 

If you’re concerned that your estate might have to pay inheritance tax (IHT) when you’re gone, there are things you can do to reduce (or even eliminate) the amount it will pay. Here’s seven tips to cut your bill. 

Step 1: Make a will 

If you die with no will, your estate will fall under the rules of intestacy, which could mean a higher IHT bill, and in the absence of any surviving relatives your estate could even pass to the Crown. A common misconception is that unmarried partners living together have the same rights as those in a marriage or civil partnership. Under intestacy rules, they will not inherit. 

You can work out the rough value of your estate today by making a list of your assets – this includes your bank accounts, investments, ISAs and property as well as any debts and liabilities that could be deducted.  

Pensions like SIPPs are generally outside of your estate and wouldn’t form part of your will, but you should check the position with your provider(s) as to what type of scheme you are in. Any older schemes with death payouts that would fall into your estate should be written into trust. Your provider can help you with this. 

Step 2: Transfer money to your spouse 

Anything gifted to a spouse or civil partner in your lifetime or left to them after you die will be exempt from IHT. And your spouse will also inherit the value of your unused nil rate band, as well as any unused residence nil rate band. Between the two of you, this means up to £1 million could be left to direct descendants without any IHT falling due. This exemption doesn’t apply to gifts between unmarried partners, even if you have lived together for many years. 

Step 3: Use annual exemptions and allowances   

There are gifts you can give each tax year that are exempt from IHT and reduce the value of your estate. The ‘annual exemption’ lets you give away a total of £3,000 each year, either to one person or split between several others. You can also give unlimited small gifts of up to £250 per person, if you haven’t used another gift to the same person. 

There are also wedding gift allowances for tax-free gifts to someone getting married or entering a civil partnership: up to £5,000 for a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else. These can be combined with other allowances. 

Other gifts that are not exempt or within the allowances above are called potentially exempt transfers, meaning they only escape IHT if you survive for seven years after making it. If you die within seven years then the value of the gift is added back into your estate, but taper relief might reduce the rate of IHT on it depending on the amount of time that has passed. 

A powerful gifting allowance that is often missed is making gifts from excess income. You can set up regular gifts from your extra income without limit, provided you can show that they do not reduce your standard of living. The best way to evidence this is to keep records of your regular income and show that you’re not having to cut back on your normal spending to make them. The records will also be needed when it comes to administering your estate and claiming the exemption. 

Step 4: Retiring? Think about drawing from non-pension assets first 

Pensions are usually free from IHT as they do not form part of your estate, unlike ISAs. If you draw on non-pension income and capital first, you are reducing the value of your estate without reducing your pension pot. Pensions can usually be passed on should you die before age 75 free of income tax (as well as IHT). On death after you reach 75, anything left to your beneficiaries is taxable as income when they draw it themselves. At this point you could consider using your pension to provide you with a regular ‘excess’ income (above your normal spending) so that you can use to make regular gifts from income. 

Step 5: Leave money to charity 

Gifts you make in your lifetime to UK registered charities are free from IHT. This also applies to charity legacies you leave on death in your will. You can also reduce the overall rate of IHT that applies on your taxable estate if you leave at least 10% of what’s known as your ‘net estate’ to charity. 

Your net estate is your total estate, less the nil rate band(s) available. If the charitable legacies are more than 10% of this net estate value, their value is deducted to give your taxable estate – which will then be taxed at 36% instead of the headline rate of 40%. 

Step 6: Get life insurance 

Depending on cost, a simple way to plan is to take out life insurance to pay the inheritance tax bill, or to cover IHT that could become payable on large gifts for seven years. You should also review any life insurance you already have, particularly what your employer might provide. That’s because the payouts from policies will count as part of the estate unless your policy is written in trust. 

Writing policies in trust removes them from your estate and means your loved ones don’t have to wait for probate to make a claim. As IHT must normally be paid within six months to avoid interest and needs to be settled before probate is granted, insurance could make things easier for your loved ones and prevent assets having to be sold to help pay any bill. 

Step 7: Have fun and spend it 

It isn’t really a tip as such, but a reminder that the simplest way to avoid paying IHT is to spend and enjoy your wealth. That could be through the gifting allowances and strategies outline above, or by making those big splurges in retirement like that bucket-list holiday or that sports car you’ve always dreamed of. Your wealth and retirement have been hard-earned and as the saying goes: you can’t take it with you. 

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