Article last updated 24 July 2025.
Inheritance tax (IHT) is charged at a rate of 40% on your estate after you die on any assets over £325,000 or £650,000 for a married couple. There’s an extra allowance of £175,000 or £350,000 for a married couple if you leave your main property to certain people, most commonly children or grandchildren, called the residence nil-rate band (RNRB).
That means you could pass on £500,000 to your beneficiaries or £1 million for a married couple without any IHT to pay. However, the rules are complicated. For example, if your estate is worth more than £2 million then the RNRB relief is tapered.
The good news is there are many things you can do make sure you don’t leave your family with an unexpected tax charge after you die. If you’re wondering about ways to reduce the IHT liability on your estate, here are some options.
1. Gifting
Using the annual exemptions available to you is a useful way to make targeted gifts to family and friends. They include some you might not have heard about before such as gifts to children or grandchildren getting married.
If after you’ve calculated your normal annual expenditure you are left with enough income to maintain your usual standard of living, you can also make (regular) gifts out of any surplus income, which will not be liable for IHT. The rules are complex and it’s important to keep extensive records for HMRC. It’s a good idea to ask a financial adviser to help you gather the required information.
2. Insuring
One less well-known strategy to protect against IHT involves taking out a life insurance policy and putting it into a trust. This approach can ensure your beneficiaries receive a lump sum after you die, which they can also use to pay the IHT bill on your estate. Bear in mind that setting up this kind of product could be subject to you needing a medical examination.
3. Investing
Some investments qualify for full IHT relief even though they remain within your estate. They include investing in the shares of companies that qualify for Business Relief (BR) after you have held them for two years. There are also some specialist BR schemes available with varying investment profiles and degrees of risk.
Depending on the scheme, these strategies tend to invest in small companies that may be less liquid than larger companies (meaning it might be difficult to sell the shares promptly). On the other hand, qualify for IHT relief after just two years, yet you’ll still own them in case you need the money at some point.
4. Pensions
Your family can (usually) inherit money within your pension scheme without any IHT liability. Make sure you’ve filled out a letter of wishes so the trustees know what to do after you die, and don’t forget there are still limits on the amount you can pay into your pension each year while you’re still alive.
If you die before your 75th birthday, the pension fund can be paid to your beneficiaries tax free. If you die after then, they will be taxed at their marginal rate of income tax whether withdrawing money as a regular income or a lump sum.
Sharing your legacy
Our experience is that children usually want their parents to enjoy their lives to the fullest rather than worry about leaving money behind. That’s why open conversations are important so everyone has a chance to express their views.
Many people choose to enjoy the money together as a family by going on holidays or doing other things that they can experience together. The challenge is to strike the right balance between giving money away while making sure you have enough to cover living expenses and the costs of care should you need it. Using cashflow modelling to understand where you stand and what you can plan for is a great way to seek reassurance about your future.
It’s also good to know that giving money away to charity can reduce the overall IHT charge on your other assets. Any charitable gifts are immediately IHT free.
This information is based on our current understanding of HMRC tax regulations in the UK.
Tax treatment depends on your individual circumstances and may be subject to change in future.
We’re here to help you explore ways to navigate IHT, as well as other issues related to managing your money. Look out for our blogs on how to fund later life care and ensure the next generation is best equipped to be financially literate.
Please contact us if you’d like to speak to one of our financial planners.
Rathbones do not offer tax advice. We recommend you speak to a tax adviser if you are unsure.
