None of us wants to hand over more Inheritance Tax than we need to the taxman, and the good news is that there are plenty of ways to legally reduce the amount owed.

Inheritance Tax is payable at a rate of 40% on the value of your estate which exceeds £325,000. There is no Inheritance Tax to pay if your estate is worth less than this £325,000 threshold, which is also known as the nil-rate band. So, for example, if your estate is worth £425,000, Inheritance Tax of £40,000 would be payable (40% of the £100,000 in excess of the £325,000 threshold). If your estate is worth £300,000, however, no Inheritance Tax would be owed, as its value is below the £325,000 nil-rate band.

There’s also an additional allowance of £175,000, called the main residence nil rate band, which can be used if you’re planning to leave your home to your children or grandchildren. If you don’t have any direct descendants, you won’t qualify for this allowance. You can find out more about how Inheritance Tax rules work in our article Understanding Inheritance Tax.

The Chancellor Jeremy Hunt announced in his Autumn Statement that the nil-rate band for Inheritance Tax and the £175,000 residence nil rate band would be frozen until April 2028, dragging more people into the Inheritance Tax net.

HMRC collected a record £7.1 billion in Inheritance Tax (IHT) in 2022/23, up £1 billion compared to the previous year.

Stephen Lowe, group communications director at retirement specialist Just Group, said: “Inheritance Tax receipts stormed to record highs this financial year as the Chancellor continues to benefit from frozen thresholds and soaring property prices through the pandemic.

“There seems to be no limit to the Treasury’s appetite for Inheritance Tax and given receipts for this financial year have already surpassed upgraded estimates, it looks set to be the goose that lays golden eggs for some time yet.”

Here, we explore some of the ways you might be able to reduce your potential Inheritance Tax liability by making the most of gift allowances and exemptions. Bear in mind that a gift is defined as anything that has a value, such as possessions and property, as well as money.

Gifts made to a spouse or civil partner

If you’re married or in a civil partnership, you can make as many gifts to your spouse or partner as you want during your lifetime free of Inheritance Tax. You can also leave your entire estate to them when you die and no Inheritance Tax will be payable.

In addition to this, if you haven’t used some of your nil-rate band – the amount you can leave tax-free – your spouse or partner can add this to their own nil-rate band when you’ve died.

For example, if you leave £50,000 from your estate to family or friends other than your spouse or civil partner, you’ll have £275,000 of your £325,000 tax-free allowance left. This can be passed on to your partner when you die, giving them a total tax-free allowance of £600,000. These rules do not apply if you make gifts to a partner you’re not married to or in a civil partnership with, regardless of how long you’ve been together.

Other exempt gifts

You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you don’t use this annual exemption one year, you can carry it forward to the next tax year. However, any unused allowance can only be carried forward for one year, so if you don’t use it by the end of that year, it will be gone for good.

Small gifts

As well as your £3,000 annual exemption, you can give as many £250 gifts per person as you want during the tax year, provided you haven’t used another exemption on the same person. So for example, if you’ve given £3,000 to someone this tax year, you can’t then give them a further £250 in the same tax year. 

Wedding or civil ceremony gifts

If someone you know is getting married or entering into a civil partnership, you can give them up to £1,000 as a wedding present, free of Inheritance Tax. This allowance rises to £2,500 if the person getting married is a grandchild or great grandchild, and to £5,000 if they are your child.

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Regular gifts

In addition to these exemptions, you can make regular gifts out of your surplus income (the income you have left over after all your outgoings have been paid) free of Inheritance Tax, as long as you can prove that making these gifts didn’t affect your standard of living. These gifts must form part of your ‘normal expenditure’ and be regularly paid out.

Gifts to charity

If you make a gift to charity in your will, there won’t be any Inheritance Tax to pay on it, so you’ll not only be helping an important cause, but it can also help keep your tax bills down.

If you’re planning to leave a substantial charitable gift, which is equivalent to 10% or more of your estate, this will reduce how much Inheritance Tax is charged on the rest, as it reduces the payable rate from 40% to 36%.

Gifts of unlimited value

If you want to give someone a large lump sum – perhaps you want to help your children with a property deposit, or pay off their student debts for them – it will be exempt from Inheritance Tax provided you live for a period of seven years after making the gift.

If you die within this seven year period, then it may be included in your estate for Inheritance Tax purposes.

Make sure your will is up to date

As well as making sure you make the most of Inheritance Tax exemptions and allowances, having an up-to-date will in place can make things much simpler for your loved ones when you die. Your will should detail what you want to happen to your assets and personal possessions after you die, and you can include other vital information such as who you would want to be the legal guardians of your children, or your grandchildren if you have parental responsibility for them. Learn what happens if you don’t have a will in our article Sorting out an estate when someone dies without a will.

Your will could also have a significant bearing on how much inheritance tax your estate has to pay. For more information, please see our guides on The importance of writing a will and guidance on How to write a will.

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They’ve done everything they can to make the process as straightforward as possible, including printing and delivery to your door. You can even get your will reviewed by their specialists to make sure it’s completed correctly.

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Inheritance Tax planning can be a complex area, so you may want to seek professional financial advice on gifts and other ways you might be able to reduce any potential liability.

You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

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