Inheritance tax can significantly reduce the amount your family receives when you pass away, but as a grandparent, there are practical ways you can help lower this burden. By giving gifts within the annual allowances, using trusts, or gifting directly to grandchildren, you can protect more of your wealth from inheritance tax. These strategies help you pass on money and assets more efficiently while following the rules.
You don’t have to wait until after you die to make an impact on inheritance tax. Making smart financial moves during your lifetime, such as taking advantage of exemptions and reliefs or supporting family members in tax-efficient ways, can ease the tax load on your estate. Understanding how these options work gives you control and helps you make decisions that benefit your loved ones.
Knowing the best ways to reduce inheritance tax means you can prepare your estate with confidence and care. This guide will show you seven clear and legal methods to help you safeguard your legacy for your grandchildren and the rest of your family.
Knowing how inheritance tax works is essential when planning to reduce tax for your family. You need to be aware of the current tax thresholds, how recent changes affect these limits, and how to correctly calculate what your estate might owe.
The main inheritance tax threshold, or nil-rate band, is currently set at £325,000. If the total value of your estate is below this, no inheritance tax is charged.
There is also a residence nil-rate band which adds up to £175,000 if you leave your home to direct descendants, such as children or grandchildren. This means you could potentially leave £500,000 tax-free.
The tax rate on any value above this threshold is 40%.
You can also give away up to £3,000 each tax year without it adding to your estate’s value for inheritance tax. This is called the annual exemption and it can be carried over one year if unused.
Recent budgets, including the Autumn Budget, have kept the inheritance tax thresholds stable but introduced changes in reliefs and reporting that may affect your planning.
Rachel Reeves, among others in government, has discussed possible future reforms to inheritance tax to address rising receipts, which hit a record £7.5bn in 2023/24. It’s wise to monitor these discussions to plan ahead.
Some reliefs, like the reduced rate of 36% when at least 10% of the estate goes to charity, remain valuable tools to lessen tax bills.
Changes to gift rules or reporting could also affect how you make tax-efficient gifts to grandchildren.
When you calculate inheritance tax, start by adding together all your assets, including property, savings, investments, and gifts made in the seven years before death.
You then subtract any debts and liabilities.
If the total estate value exceeds the nil-rate bands, tax at 40% applies to the excess amount.
The seven-year rule is important: gifts made more than seven years before death usually avoid tax.
Using careful valuation and considering exemptions like annual gifts or charitable donations helps reduce your inheritance tax liability.
Keeping clear records of all gifts and assets is essential when preparing for inheritance tax.
You can reduce the value of your estate by giving money or assets to your family during your lifetime. There are limits and rules that let you give gifts without triggering inheritance tax. Understanding these rules helps you make the most of your gifts.
You can give up to £3,000 each tax year without it being added to your estate for inheritance tax. This is called the annual exemption. If you don’t use all of this allowance in one year, you can carry the unused amount forward, but only for one year.
This exemption applies per person, so you can give £3,000 to each grandchild without tax consequences. Keep in mind that if you give more than the £3,000 allowance, the excess may count as a gift that is potentially exempt, which ties into the seven-year rule.
Besides the annual exemption, you can also make tax-free gifts on certain occasions. For example, you can give up to £2,500 as a wedding gift per grandchild without inheritance tax.
Additionally, small gifts of up to £250 per person each tax year are also exempt. However, this small gift allowance can’t be combined with the annual exemption for the same recipient.
These allowances let you make meaningful gifts without affecting your inheritance tax position.
Any gift over your annual exemption may be classed as a potentially exempt transfer (PET). This means if you survive for seven years after making the gift, it won’t be counted as part of your estate for inheritance tax.
If you die within seven years, the gift will be added back to your estate and may be taxed. The tax rate reduces on a sliding scale depending on how many years pass between the gift and your death:
| Years Between Gift and Death | Tax Charged on Gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
Remember, gifts where you keep control or benefit, called gifts with reservation, may still be part of your estate even if made more than seven years ago.
You can use your regular income and financial support to help reduce the taxable value of your estate. This method often involves gifting excess income or covering family expenses without attracting inheritance tax. It also means you can provide for your loved ones without triggering capital gains tax or affecting your estate plan.
You may be able to gift money from your surplus income each year without it being added to your estate for inheritance tax purposes. This means the gifts are exempt if they come from income that you do not need to cover your living costs.
To qualify, you must keep detailed records showing that the gifts are regular, from income rather than savings, and do not reduce your standard of living. These gifts can include cash payments made monthly or yearly.
Using this strategy reduces your estate gradually and legally, helping to protect your family’s inheritance without complicated tax consequences.
You can help reduce inheritance tax by paying for certain family expenses directly. These payments might cover everyday maintenance costs or specific family support needs, such as housing or care.
The money you spend on regular family maintenance, as long as it comes from your income and is clearly documented, usually does not count as part of your estate. This reduces its taxable value when you pass away.
Make sure to keep clear evidence of the expenses and show they are routine and within your means. This helps avoid disputes with HMRC and ensures your gifts remain exempt.
Paying grandchildren’s school fees directly is an effective way to reduce inheritance tax. These payments, if made straight to the school and from your surplus income, are not added to your estate.
You should ensure the fees are ongoing and part of your routine income expenditure. Unlike gifts of cash, paying school fees directly avoids the money becoming part of the child’s estate, which could have tax implications.
This method offers a straightforward way to help with education costs and reduce your estate tax liability at the same time. Keep detailed records of payments to support your tax position.
Setting up trusts lets you pass on assets while reducing the taxable value of your estate. You maintain control over how and when the assets are distributed, which can protect your family’s wealth from inheritance tax. Different types of trusts offer varied benefits, depending on your long-term goals and needs.
There are several trust types to consider for inheritance tax planning.
Each trust type affects tax and control differently, so choosing the right one matters for your estate plan.
Trusts allow you to set clear rules for how assets are used, giving you control beyond your lifetime. You can specify purposes like education or property purchase to ensure your wealth supports your family’s needs.
Flexibility is key in trusts like discretionary ones, where trustees can adjust distributions based on circumstances. This ability to react to changes helps protect your family’s financial security over time.
Placing assets into a trust also means they aren’t counted as part of your estate for inheritance tax if you survive seven years after the transfer. This is a crucial step in long-term tax-efficient gifting and family wealth preservation.
You can use Junior ISAs and pensions to pass wealth to your grandchildren without creating large inheritance tax (IHT) charges. Both allow tax-free growth, but they work differently and have distinct rules around access and tax on withdrawal.
A Junior ISA lets you save or invest up to £9,000 a year for a child, with all growth free from income tax and capital gains tax. Only a parent or guardian can open the account, but anyone, including grandparents, can contribute.
The child gains control of the Junior ISA at age 18, making this a straightforward way to pass on wealth early. The tax advantages mean the money can grow without being reduced by IHT.
Junior ISAs are ideal if you want the grandchild to access funds as they become adults—for example, to help with university costs or a first home deposit.
Pensions provide a powerful way to avoid inheritance tax. When you die, your pension pot can generally be passed free of IHT to your chosen beneficiaries, including grandchildren.
If you die before age 75, withdrawals from an inherited pension are free of income tax for your descendants. After 75, income tax is payable at their rate but the value remains outside your estate for IHT purposes.
You can also gift money directly from your pension once over 55 (rising to 57 in 2028), withdrawing 25% tax-free. Any further withdrawals count as income and may affect tax liabilities.
Using pensions strategically lets you reduce your estate’s value for IHT while still helping younger generations financially.
You can reduce the inheritance tax (IHT) bill by using reliefs designed for qualifying business and farming assets. These reliefs lower the value of your estate for tax purposes, helping to protect important family assets like farms or family businesses. Knowing how the reliefs work and their limits is key to effective planning.
Business Property Relief (BPR) can reduce the value of your business assets by up to 100% for IHT if they qualify. This includes unquoted shares, business property, and certain types of assets used in the business. However, shares listed on recognised stock exchanges often only qualify for 50% relief if classified as ‘not listed’.
You should review which assets qualify carefully. For example, shares traded on foreign or recognised stock exchanges but not classed as listed may lose full relief. Preparing your business and its shares now is important, as rules change from April 2026.
BPR also offers an interest-free instalment option to pay tax, which can ease cash flow when settling IHT. Using trusts can help manage BPR assets, but new rules will affect how relief is applied to trusts holding business property after October 2024.
Agricultural Property Relief (APR) reduces the value of qualifying farmland and buildings by up to 100%, helping farmers pass on their land without heavy tax charges. To qualify, the land must be used for farming and meet specific occupancy and use conditions.
You should check if your farm assets will benefit from the new £1 million relief allowance starting April 2026, which caps the value qualifying for full relief. Anything above this limit is taxed at 50%. This change means it’s important to plan your estate to maximise relief within the allowance.
You can include family trusts in agricultural planning to protect assets, but new rules on how relief applies to trusts also come into force from April 2026. Reviewing your arrangements before then will help you avoid unexpected tax charges.
Trusted Consultants for Comprehensive Wealth Solutions – Whether you need a professional estate planning consultant, expert pensions consultant, or reliable inheritance tax advice, Assured Private Wealth is here to guide you. We also specialise in will writing services to protect your legacy.
Call us for a friendly chat on 02380 661 166 or email: info@apw-ifa.co.uk
