How To Reduce The Inheritance Tax You Pay

November 30, 2018

What’s changed with inheritance tax?

You should be pretty familiar with that fact that that when you pass away, your estate is subject to Inheritance Tax (IHT).

In 2015 George Osbourne, the former Chancellor of The Exchequer, announced that he would scrap the duty on homes worth up to £1million per couple. This scheme is to be gradually introduced until April 2020/21.

The nil-rate-band hasn’t changed. This remains at £325,000 per person. But there has been a main residence band added. The band comes into effect if your estate includes a property.

The current residence band allowance in 2018/19 is £125,00 per person. It will increase by £25,000 per year until 2020/21. By then the residence band allowance will be to £175,000 per person.

This is on top of the £325,000 nil-rate-band per person. Currently the value of your estate that you’re allowed to pass on without being subject to IHT is £450,00 per person – £900,000 per couple. As long as your property is valued at, or in excess of the residence nil rate band (RNRB). By 2020/21 it will raise to £1million per couple.

After 2020/21 the new band rate will increase in line with the Consumer Price Index.

The ‘main residence’ band only applies to your direct descendants

For the additional band to be valid, the person you’re passing your estate down to has to be a direct descendant. Your Child (including step-children, adopted children and foster children) or Grandchild.

The RNRB is also available where a qualifying residential property is left to a trust on death. Where the direct descendant is treated as owning the trust assets.

How can you reduce your IHT? 

We hear you. You’ve worked hard for your money. No one wants to make their family pay IHT if they can help it. There are a few ways you can reduce the potential IHT your family will have to pay.


Plan early! Any money you give away is counted as part of your estate. As long as you live for more than seven years after gifting there is usually no IHT to pay! An exception to this rule is lifetime IHT may apply where funds in excess of the NRB are transferred to a trust.

You can give away £3,000 of gifts each tax year under your annual exemption. An unlimited number of smaller £250 gifts can be made. They do not count towards your annual exemption.

Is someone getting married? Great. You can gift the happy couple an amount of up to £5,000 IHT free. This is dependent on their relationship to you. £5,000 for your children, £2,500 for your Great/Grandchildren and £1,000 for anyone else. This is in addition to the above £3,000 annual exemption.

Giving to charities or political parties

Any money that you leave to charities or political parties is exempt of IHT. It may not be going to your family, but it is at least helping a cause that you believe in.

Gifting more than 10% of your estate to a charity comes with an added bonus. The IHT that your family may have to pay on your estate above the nil-rate-band and new residence band is reduced from 40% to 36%. When a transfer on death designation is in place.

Set up a trust

Trusts can be set up to hold some of your savings and investments. This removes them from your estate after seven years. This means they are no longer subject to IHT. Once the trust has been passed on, they form part of the estate of those you pass it on to.

There are several trust options to consider. They can be a bit complicated so have a chat with us if it is something you want to consider.

Alternatively, you can just be prepared for IHT

The final option here is to simply be prepared. Protection policies can be taken out. They will pay out a lump sum to cover any IHT bills. Don’t forget to have any policies written out in trust.

Get in touch if you’d like to have a chat about protecting your estate from IHT.

The Financial Conduct Authority does not regulate Tax Advice, Estate Planning or Trusts.