Pay less tax: ways to reduce IHT

Michelle McGagh
Tory hints at inheritance tax cut
Tory hints at inheritance tax cut

With a Conservative government in power it is likely that we will see changes to inheritance tax (IHT) rules that will take family homes of £1 million out of the hated 40% tax.

The Tories want to introduce an additional £125,000 property band on top of the current £325,000 nil rate band, meaning a couple with a property worth £1 million will not see IHT levied on it.

However, you don't need to wait for the government to change the law before you can save money on IHT. This is not a compulsory tax and you are entitled to do everything you can to avoid it, so here are the best ways:

Your guide to Inheritance tax


Everyone is entitled to make gifts from their money each year up to £3,00 that immediately fall outside of the estate for IHT purposes.

If you want to give away more than this you can but you have to survive for seven years in order for the gift to be exempt from IHT – these are known as 'potentially exempt transfers'. If you're in good health then PETs may be a good way to reduce your estate for the future and provide a 'living inheritance' to your family now.


If you don't trust your loved ones with piles of cash or are worried about their personal circumstances, such as a partner you disapprove of, you can pass money on and still retain some element of control from the grave by using trusts.

There are a number of trusts on offer that do different things depending on what you need, ones that pay out only income, ones where you can control when the inheritance is accessed and others where you can swap change beneficiaries.

Life insurance

If you've ringfenced as much money as you can and gifted away as much as possible but your loved ones are still going to encounter an IHT bill when you're gone, you could take out an insurance policy to cover the bill.

The life insurance is written in trust, which means the money is outside of your estate and the beneficiaries can pay off the tax bill easily. This is a particularly good idea if you want your home to staying the family as the next generation don't have to sell the property to pay the IHT bill.

Your guide to Inheritance tax

Pass on your pension

Under recent pension reforms, pensions can be left to anyone you please not just a spouse. This means they can be used as a beneficial tax planning vehicle.

The money is passed on tax-free from a pension if you die before age 75 and if you die after the beneficiary pays a death tax at 45% until April 2016 and after that the rules change again and they pay tax at their income tax rate. If, for example, you passed your pension on to grandchildren who aren't working and they take less than £10,000 a year from the pension, they would have no tax to pay.

Read more:
How an IHT overhaul could solve the pensions crisis

The gov't is bumping up house prices and taxing us more for the privilege

Five ways to save on inheritance tax

Election 2015: David Cameron Vows to End Inheritance Tax
Election 2015: David Cameron Vows to End Inheritance Tax