How to reduce inheritance tax legally
Start with the free ones. Most families can cut their exposure substantially without paying anybody for a scheme.
The short answer
- Write the wills so the £175,000 residence allowance applies and the transferable bands can be claimed. Free, and the most commonly missed.
- Use the £3,000 annual gift exemption every year, plus £250 small gifts.
- Make regular gifts out of surplus income — immediately exempt, potentially unlimited, needs records.
- Leave 10% of the net estate to charity and the rate on the rest falls from 40% to 36%.
- Larger gifts leave your estate after 7 years years — but you must genuinely give them away.
What's on this page
Start here: the free fixes#
1. Get the wills right#
The residence nil-rate band of £175,000 each requires your home to pass to direct descendants. Whether it does depends entirely on how the will is drafted. Getting this wrong costs up to 40% of £350,000.
2. Make sure the transferable allowances get claimed#
A surviving spouse's executors must claim the unused bands on forms IHT402 and IHT436. Keep the first partner's death certificate, marriage certificate, will and grant of probate together, and tell your executors where they are.
Gifting: the workhorse#
3. The annual exemption — £3,000 a year#
Immediately outside your estate, no waiting period. If you did not use last year's, you can carry it forward one year — so up to £3,000 × 2 in one go. Over ten years a couple can move a six-figure sum out of their estates using nothing but this.
4. Small gifts and wedding gifts#
£250 per person per tax year, to as many different people as you like. Plus wedding gifts of £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
5. Regular gifts out of surplus income#
Gifts made regularly, out of income (not capital), that do not affect your standard of living, are exempt immediately with no upper limit and no 7 years-year wait. Paying grandchildren's school fees, or a standing order to an adult child, can qualify.
It lives or dies on evidence. Keep a simple record of income, expenditure and gifts each year — HMRC expects to see the pattern, and your executors will need it. Form IHT403 is where the claim is made.
6. Larger gifts and the 7 years-year rule#
Bigger gifts are potentially exempt transfers: survive 7 years years and they fall out of your estate entirely. Die within that period and they count back in, with taper relief reducing the tax where the gift was made more than three years before death.
A gift with reservation of benefit does not work. Sign the house to the children and keep living there rent-free, and it stays in your estate however long you survive. It also creates capital gains problems for them and exposes the property to their divorces and creditors. This is the most common piece of DIY planning, and one of the least effective.
Structural options#
7. Leave 10% to charity#
Leave 10% or more of the net estate to charity and the inheritance tax rate on everything else drops from 40% to 36%. If you were going to leave anything to charity at all, the arithmetic of reaching the 10% threshold is often surprisingly favourable to the other beneficiaries.
8. Life cover written in trust#
A whole-of-life policy written in trust pays out outside your estate, directly to your beneficiaries, without waiting for probate. It does not reduce the tax — it provides the cash to pay it, which prevents a forced sale of the family home. Premiums may themselves qualify as gifts out of income.
9. Pensions#
Pensions have historically sat outside the estate, making them efficient to leave untouched while spending other assets. This area is changing following announced reforms, so check the current position on GOV.UK and take advice before planning around a pension.
10. Business and agricultural property relief#
Qualifying trading businesses and farmland can attract substantial relief. The conditions are detailed and the rules have been altered in recent Budgets — this is specialist territory and worth proper advice if it applies to you.
What to be sceptical of#
- Schemes marketed as "IHT solutions" at seminars, particularly involving home loans or complex trust arrangements. Many have been defeated by HMRC or caught by anti-avoidance rules.
- Anything requiring disclosure under DOTAS. If a scheme has a disclosure number, it is aggressive by definition.
- "Give the house to the kids" as free advice from a friend. See above.
- Trusts sold as tax savers without mention of the 20% entry charge, 6% ten-yearly charge and exit charges.
A sensible order of operations#
- Work out whether you have a problem at all — use the calculator.
- Fix the wills.
- Start using the annual allowances, every year.
- Set up regular gifts from surplus income, and record them.
- Consider the charity rate if you were giving anyway.
- Take regulated advice for anything larger — particularly near the £2,000,000 taper.
Want this checked for your own situation?
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Frequently asked questions
Can I give my house to my children to avoid inheritance tax?
Not effectively, if you carry on living there. The gift with reservation of benefit rules keep it in your estate no matter how many years pass. It also loses the capital gains uplift on death, exposes the property to your children's creditors and divorces, and can be treated as deliberate deprivation of assets for care fees. It is rarely the right answer.
How much can I give away each year tax-free?
£3,000 under the annual exemption, carried forward one year if unused. Plus £250 per person per year to as many people as you like, wedding gifts within set limits, and unlimited regular gifts out of surplus income where they do not affect your standard of living.
Does the 7-year rule apply to care fees too?
No. The 7 years-year rule is inheritance tax only. Local authorities assessing care charges apply the deliberate deprivation of assets rules, which have no time limit whatsoever. Conflating the two is the most damaging misconception in this area.
Is it worth leaving money to charity to cut the tax?
If you were going to leave something to charity anyway, reaching the 10% threshold is often close to cost-neutral for your other beneficiaries, because the rate on everything else falls from 40% to 36%. If you had no charitable intention, giving away 10% to save 4 percentage points of tax leaves your family with less.
Do I need a trust to reduce inheritance tax?
Usually not. For most estates the allowances, correct wills and regular gifting do more than a trust would, at lower cost and with no ongoing administration. Trusts have their place — vulnerable beneficiaries, second marriages, control over timing — but they are not a general-purpose tax reducer, and their own charges can outweigh the benefit.
This is general information, not legal advice. Everyone's situation is different — speak to a qualified adviser before acting. KeepTheLot is an independent information service covering England & Wales. We are not a law firm.
Part of our guide to inheritance tax.