No one loves to pay taxes. But there is one tax that stands head and shoulders above the others when it comes to unpopularity.

And the winner of this dubious accolade? Inheritance Tax, or IHT as it is also known, according to a survey that found 90% of those asked said they disliked the tax.

It’s hardly surprising when you consider it has the potential to reduce the amount you leave to loved ones by 40 pence in the pound, subject to exemptions called the “nil-rate band” (NRB).

The NRB is the amount you are allowed to leave loved ones before IHT is due. During this year’s Budget, chancellor Rishi Sunak froze the nil-rate band at £325,000 per person until 2026.

According to the Treasury’s own figures, the move could raise an additional £445 million for the government by 2026.

But there are a number of allowances that can be used to reduce liability to IHT. Read on to discover how they work, and how you might be able to leave your money to loved ones without an IHT liability.

IHT is the tax loved ones pay on your estate

IHT is the tax your estate pays on your worldly belongings on your death, or your spouse’s if they die after you. If your estate is valued above the NRB, it is liable to IHT at 40%.

The £325,000 NRB can also be passed to a spouse, meaning married couples have up to £650,000 before becoming liable to IHT.

Many people will also have the residence nil-rate band, which currently stands at £175,000 per person, raising an individual’s total nil-rate band to £500,000, or £1 million for a married couple. To use this additional nil-rate band you have to leave your home to a direct lineal descendant, such as a child or grandchild.

1. Reduce your estate to within the nil-rate band

Giving your money away may not sound like good advice, but sometimes it’s the best strategy for you to take. Gifting reduces the value of your estate, potentially bringing it back within the nil-rate bands that are available.

There are rules you will need to meet, however, so always speak with a financial planner before doing anything.

One way of reducing your estate is to use the range of allowances for gifts that HMRC allows everyone to make during a tax year. These include:

• £3,000 can be given as a gift each tax year, split between however many people you like, but the total must not exceed £3,000. You can also use an unspent allowance from the previous year, totalling up to £6,000.
• Unlimited gifts of up to £250 to others.
• You can give up to £1,000 as a wedding gift.
• You can also give wedding gifts of up to £2,500 to grandchildren or £5,000 to your children. Wedding gifts must be made before the wedding, and the wedding must go ahead.

2. If you make a gift and live for seven years, it’s IHT free

You can make a gift of any size which will fall outside of your estate as long as you live for seven years after making the gift, and you do not continue to benefit from it while you are alive.

If you don’t survive for seven years the gift could be liable to a sliding scale of IHT up to the maximum 40%, depending on how long you live for.

3. Gifts out of normal expenditure

This is a very underused gift, which allows you to make regular gifts to someone as long as they do not impact on your standard of living and are made regularly – so perhaps monthly or annually.

The gift must also come from income after taxation has been taken, not from savings or investments deemed to be “capital”. If the gifts meet these rules, they can be for any amount – but it’s important to keep good records to demonstrate that the gifts were made regularly from income.

4. Putting assets into trust typically removes them from your estate

Placing money, a property or investments into a trust removes them from your estate for IHT purposes. However, this also means you cannot benefit from the assets in the trust, or they will become subject to the tax.

You may want to do this to provide a fund for school fees or university costs for your grandchildren, for example.

Professional financial advice should be sought when doing this, as trusts are complicated and could carry tax consequences.

5. Reduce your liability by leaving your estate to charity

Any gift you make to a UK registered charity, political party or local sports club is free of IHT.

If you leave more than 10% of the estate that would be liable to IHT to one of these groups, the IHT rate payable on the rest of your estate typically reduces from 40% to 36%.

6. Your pension is outside your estate, so consider using it last

As pensions typically fall outside your estate, you could consider living off your savings and investments before taking an income from your pension. Doing this means you are reducing the size of the assets and investments liable to IHT and preserving the one that isn’t.

7. Make a will and plan a IHT mitigation strategy

Making a will allows you to choose how your assets will be treated on death, giving you time to do some careful planning to reduce, or potentially avoid IHT.

When doing this it is essential to speak with a financial planner who can help you do it in the most tax-efficient way.

Get in touch

If you have any questions about being liable to IHT, or would like to discuss using any of the above allowances to reduce your estate, please contact us on 0800 434 6337.

Please note:

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.