If you want to reduce the amount of inheritance tax your beneficiaries will have to pay, using gifts and trusts is an effective approach. Gifting assets during your lifetime, especially if you survive for seven years after making the gift, can remove those assets from your estate and lower your tax bill. This works because gifts made more than seven years before your death are usually exempt from inheritance tax.
Trusts allow you to place assets outside of your estate while maintaining some control over how they are managed and distributed. By putting assets into a trust, you can manage the tax implications carefully, but you need to understand that some trusts may trigger immediate tax charges or ongoing fees. Knowing the rules around these options helps you make clearer decisions to protect your estate and reduce taxes legally.
Inheritance Tax (IHT) can significantly affect the value of your estate. Knowing how it works, how your liability is calculated, and which allowances apply helps you plan effectively. This knowledge is essential for using gifts and trusts to reduce your tax bill.
Inheritance Tax is a tax on the estate you leave behind after you die. It includes money, property, and possessions. If the total value of your estate is above a certain threshold, IHT is charged.
This tax is usually paid by your estate before assets are passed to your heirs. However, gifts made in the seven years before death can also be subject to IHT. These are called "potentially exempt transfers" and may be taxed if you die within that period.
You don’t have to pay IHT on everything you give away during your lifetime, especially if you use the right exemptions and allowances.
IHT is charged at 40% on the part of your estate above the tax-free threshold. To work out your liability, you add up:
If the total exceeds your nil rate band, IHT applies to the amount over it.
Some reliefs may reduce the tax payable, such as taper relief on gifts made 3 to 7 years before death. But if you die within 3 years of making certain gifts, no relief applies and tax is charged fully.
The nil rate band is the amount up to which no IHT is charged. For the 2025/26 tax year, this is £325,000.
If you leave your main home to your children or grandchildren, you may also qualify for the residence nil rate band. This can add an extra allowance of up to £175,000, increasing your total tax-free allowance.
Other allowances include:
Using these allowances wisely reduces your inheritance tax liability before you consider larger gifts or trusts.
There are several ways you can give gifts to reduce your Inheritance Tax (IHT) liability without causing tax issues. Using allowances and careful planning helps you transfer wealth effectively while lowering the chance of IHT being charged.
You can give away up to £3,000 each tax year without it adding to your estate for IHT purposes. This is called the annual exemption. If you didn’t use last year’s allowance, you can carry it forward for one year, allowing a total of £6,000 to be gifted tax-free.
In addition, you may give small gifts up to £250 per person each year, as long as the recipient hasn’t received any other gift from you that year. These exemptions allow you to reduce your estate bit by bit without triggering IHT or complicated paperwork.
When you give gifts above the exempt amounts, they are called Potentially Exempt Transfers (PETs). These do not incur IHT immediately but become exempt if you live for at least seven years after making the gift.
If you die within seven years, the gift will be considered part of your estate and may be taxed. However, the longer you live after gifting, the less tax the gift might attract. This rule encourages planning gifts well in advance of your death.
If you die between 3 and 7 years after making a gift, the IHT due on that gift may reduce by taper relief. The tax reduction depends on how many years passed between the gift and your death:
| Years before death | Tax reduction (%) |
|---|---|
| 0-3 | 0 |
| 3-4 | 20 |
| 4-5 | 40 |
| 5-6 | 60 |
| 6-7 | 80 |
Taper relief does not remove the tax entirely but can lower the amount your estate owes. Gifts made less than three years before death have no relief.
You can make regular gifts out of your income without these counting towards your estate for IHT if you can maintain your usual standard of living. These gifts must come from surplus income and not from capital or savings.
Common examples are monthly payments or annual gifts made consistently over time. You should keep good records to prove the gifts come from your income to avoid disputes. This method allows you to pass money tax-free during your lifetime without affecting your other allowances.
Trusts allow you to transfer assets while keeping some control over how they are used. They can reduce your inheritance tax (IHT) bill but involve specific rules about when tax is due. Understanding different types of trusts and setting them up correctly is important to make the most of these benefits.
When you put assets into a trust, you no longer own them. For IHT, these assets are treated separately from your estate. However, certain taxes apply: an entry charge when assets are transferred in, exit charges when assets leave the trust, and a 10-year anniversary charge on the value of assets still in the trust.
Most trusts hold “relevant property,” meaning they may be liable for IHT at these points. If you die within seven years of placing assets in trust, the full 40% IHT can apply. Also, if you benefit from assets in the trust, the tax relief is often limited.
Discretionary trusts are common for IHT planning. Trustees have full discretion over how to use the trust assets for beneficiaries, which helps protect assets and can reduce immediate IHT liability. However, these trusts can face charges every 10 years and when assets are paid out.
Other types include interest in possession trusts, where a beneficiary has a right to income or use of assets, and trusts for disabled persons, which have special tax rules. Each type affects how IHT is charged and how the assets are treated within your estate.
Before setting up a trust, you should consider the purpose, who will be trustees, and the beneficiaries. Trustees must manage the trust properly and comply with tax rules, including paying IHT when due.
You’ll also need to understand the IHT thresholds and potential charges. Transfers over £325,000 can trigger tax. It’s important to plan transfers carefully to avoid unexpected costs and ensure your intentions for the assets are followed.
Professional advice is highly recommended to ensure the trust is set up in a way that meets your goals and tax requirements.
Donating to charity can help you lower your inheritance tax bill while supporting causes you care about. Gifts to registered charities are fully exempt from inheritance tax. Making these gifts in your will not only reduces the value of your taxable estate but can also lower the tax rate on the rest of your estate if certain conditions are met.
When you leave money or assets to a UK charity in your will, the gift is exempt from inheritance tax. This means the value of the gift is removed from your estate before tax is calculated. There is no limit to the amount you can give to charity without incurring inheritance tax.
You can gift cash, property, shares or other assets. However, it’s important to ensure the charity is registered and recognised by HMRC to qualify for tax exemption. These charitable gifts do not reduce the amount you can pass on to other beneficiaries; instead, they reduce the overall taxable value of your estate.
If you leave at least 10% of your net estate to charity, the inheritance tax rate on the remaining estate reduces from 40% to 36%. This lower rate applies to the entire estate, not just the portion left to charity.
To benefit, you must clearly state in your will that the charitable gift equals 10% or more of your estate. This can significantly reduce the tax your estate owes and increase the amount your heirs receive after tax. Using charitable bequests in this way offers both philanthropic and financial advantages.
You can use specific financial tools to lower your inheritance tax bill by protecting assets and directing them carefully. These tools include insurance policies placed in trusts, pension strategies to reduce tax exposure, and planning for beneficiaries to manage how and when they receive assets.
Placing a life insurance policy into a trust means the payout doesn't form part of your estate when you die. This action removes the policy value from your taxable estate, reducing the inheritance tax due.
The trust ensures the money goes directly to your chosen beneficiaries, avoiding probate delays. You can also control how and when the funds are used, protecting assets for minors or other vulnerable heirs.
This method keeps the insurance payout safe from tax and provides quick access to funds for your family, helping cover inheritance tax bills or other expenses without touching the rest of your estate.
Traditionally, pension funds were not included in your estate for inheritance tax purposes, but from April 2027, most pensions will count as part of your taxable estate.
To reduce tax on pensions, you can withdraw money strategically while alive or set up trusts such as a spousal bypass trust to keep pension funds out of your estate.
Review pension beneficiary nominations regularly to ensure tax efficiency. Using pension income gifts can lower your estate’s value without triggering IHT.
Understanding these changes helps you avoid double taxation and preserve more pension wealth for your beneficiaries.
You can lower your inheritance tax bill by controlling how and when beneficiaries receive their inheritance.
Using trusts allows you to manage distributions, protect assets from creditors, and delay tax liabilities. Beneficiaries can be children, grandchildren, or others, with conditions set to protect their interests.
Gifting assets early can reduce your estate’s value, but you must survive seven years for these gifts to be exempt from IHT. Remember to avoid gifts with reservation of benefit, where you keep using the asset but it still counts as part of your estate.
Plan gifts carefully to maximise exemptions and protect your wealth across generations.
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