Inheritance Tax can feel like a complicated, often worrying, subject. However, with proper planning and professional guidance, it is possible to reduce your liability and ensure that a larger percentage of your estate goes to those you care about. In many cases, proactive planning may significantly reduce, and in some circumstances eliminate, an Inheritance Tax liability.
In this guide, we look at five practical, actionable strategies which help you to manage and potentially lower your inheritance tax liability in a clear, easy-to-understand way.
1. Make the most of your nil-rate band
The nil-rate band is the cornerstone of successful inheritance tax planning. It refers to the portion of your estate that can be passed on without incurring any inheritance tax liability and understanding how it works can make a big difference to the size of your legacy.
What is the nil-rate band?
As of the 2025/26 tax year, the nil-rate band is £325,000 per person. This means that the first £325,000 of your estate is passed to your descendants tax-free. Anything above this threshold is typically taxed at 40%.
If you are married or in a civil partnership, you have an advantage. When the first partner passes away, any unused portion of their nil-rate band can usually be transferred to the surviving partner, essentially doubling their nil-rate band to £650,000.
The residence nil-rate band
In addition to the standard nil-rate band, we have the residence nil-rate band. This applies when your primary residence is passed down to direct descendants (typically children or grandchildren). For the 2025/26 tax year, the residence nil-rate band is £175,000 per person, although this tapers down for larger estates of £2m or more. For estates of this size, the residence nil-rate band decreases by £1 for every £2 over the threshold your estate is.
This means that for a single person meeting the residence nil-rate band criteria, their tax-free allowance is £500,000. For a married couple, it is £1million.
Ensure you fully benefit
It is easy to overlook the details of how the nil-rate band works, but there are a few simple steps that you can take to ensure you don’t lose out.
Keep your will up to date
Wills written before the introduction of the residence nil-rate band (in 2017) may not take full advantage of the available allowances.
Review ownership structures
How you own your property (whether joint tenants or tenants in common) can impact how allowances are applied.
Consider timing and distribution
If one spouse’s estate is considerably smaller, you may want to review how assets are distributed to maximise both allowances.
Tip: Even if your estate isn’t currently above the threshold, property value and/or investment growth over time may change that, especially considering that the nil-rate band has been frozen at £325,000 since 2009. As a result, many people now have an inheritance tax liability without realising it. Regularly reviewing the size of your estate helps you to plan ahead and avoid any potentially unnecessary inheritance tax liabilities.
2. Consider gifting
Gifting during your lifetime is one of the easiest and most effective ways to reduce your inheritance tax liability. By gifting away money or assets now, you can shrink the size of your estate and potentially reduce the tax payable when you pass away.
How lifetime gifts work
In the UK, gifts to another individual are generally referred to as Potentially Exempt Transfers (PETs). Provided that you survive seven years after making the gift, it then falls outside of your estate for inheritance tax purposes.
For example, imagine you gift your child £250,000. Provided that you survive seven years from that date that the gift is made, that £250,000 is no longer considered to be a part of your estate.
Should you pass away within seven years of making that gift, taper relief may apply if the total gifted is above the nil-rate bands mentioned above. The amount of relief available is dependent on the number of years between the gift being made and your passing. To find out more about taper relief, read our guide to the seven year rule.
Annual Exemptions
If you are concerned about the seven-year rule and wish to transfer money more quickly, there are several exemptions which you may be able to take advantage of:
£3,000 per year tax free
Each individual can gift away up to £3,000 per year completely tax free. Any allowance unused one year can be carried forward. For example, if you only gifted £1,000 last year, this year you would be able to gift £5,000. However, the amount that you can carry forward is capped at £3,000 (you are unable to “stack” exemptions).
Small gifts
Gifts of up to £250 per person per year are exempt from inheritance tax, provided that no other exemption has been used on the same person.
Wedding or civil partnership gifts
Parents can gift up to £5,000 as a gift to their child on their wedding day. For grandparents, this amount lowers to £2,500. For anyone else, the tax-free allowance is £1,000.
These exemptions are a powerful tool in allowing you to make regular, tax-efficient gifts to family members without needing to worry about complicated legal structures.
Tip: gifts made must be ‘in consideration of’ marriage so must be made before the date of the wedding to be exempt.
Gifting assets other than cash
It is possible to gift assets other than cash to lower your inheritance tax liability. These assets include:
Shares and investments
Transferring shares or other investments may allow you to reduce your inheritance tax liability. However, it is important to remember that capital gains tax may apply in some cases, so it is important to conduct some research prior to gifting.
Property
You can gift property, although there are important considerations to be made. If you gift a property that you subsequently continue to live in, you must pay rent at market value to the person you gift to. Capital gains tax is also a consideration in these cases.
Valuable personal items
Jewellery, antiques, art, classic cars and other such valuable items can be gifted outright, although like cash gifts these are subject to the seven-year rule.
Important considerations
When gifting in any form, there are some important considerations to be mindful of:
Maintain records
Always keep records of any gifts that you make, including the date, recipient and value. This is important should HMRC require clarification further down the line.
Gifts with conditions
It is possible to gift assets but retain some benefits from them, such as income. These are considered to be ‘gifts with reservation’ and may still be counted as part of your taxable estate.
Professional advice
Large gifts or complex assets should be reviewed with a financial adviser to ensure that they are handled correctly and in a tax-efficient manner.
Tip: Lifetime gifts are not only an easy, effective way to reduce your inheritance tax liability, but come with the additional benefit of allowing you to see your beneficiaries enjoy the gift while you’re still alive.
3. Make use of discretionary trusts
Trusts are a powerful tool in inheritance tax planning and may help reduce the value of your taxable estate (in certain circumstances). By placing assets into a trust, you can protect them from being fully counted in your estate while still benefitting your chosen beneficiaries.
While several types of trust exist, discretionary trusts are among the most flexible and commonly used for inheritance tax purposes.
What is a discretionary trust?
A discretionary trust allows the trustees (people who you appoint to manage the trust) to decide who receives incomes or capital from the trust and when they receive it. The beneficiaries have no automatic entitlement. They are considered to be potential recipients rather than guaranteed ones.
This flexibility makes discretionary trusts particularly useful should you wish to:
- Provide for children or grandchildren but want to wait until they are responsible enough to receive their inheritance.
- Protect assets from potential financial risks, such as divorce or bankruptcy.
- Retain control over how and when your beneficiaries receive their funds.
How discretionary trusts can reduce your inheritance tax liability
By moving assets into a discretionary trust, you can start building assets outside of your taxable estate, lowering your overall inheritance tax liability. Put simply, once a gift is inside the trust, it is outside your estate once you survive seven years (the seven-year rule applies in full).
It may be that you wish to retain access to the original capital. In such cases, you can loan, rather than gift, to a trust. The investment growth is immediately outside of your estate, but you retain access to an income or capital from the originally loaned funds.
Here’s how discretionary trusts work:
You gift/loan assets to the trust; this can be cash, shares or property.
The trust holds the assets; therefore, they are no longer part of your estate.
Trustees distribute the assets; trustees can decide when and how to give money or assets to beneficiaries, according to the trust deed.
Tax considerations
While discretionary trusts offer several inheritance tax benefits, they do have their own tax rules which are important to understand:
Entry Charge
If gifting into the trust and the sum exceeds the nil-rate band, there will likely be an initial taxation of 20%.
Periodic charges
Every 10 years, the trust may face a periodic charge, which is typically 6% of the value of trust assets above the nil-rate band threshold.
Exit charges
Depending on the timing and the value, there may be a charge when assets are distributed to beneficiaries.
Benefits beyond tax
While discretionary trusts are a strong tool for tax-efficiency, there are several benefits beyond this:
Control
You can specify conditions for when the beneficiaries receive the funds, such as reaching a certain age.
Protection
Assets in a discretionary trust are generally safeguarded against beneficiaries’ creditors or from being mismanaged. This means they are protected in instances of bankruptcy, divorce or beneficiaries who are vulnerable.
Flexibility
Trustees retain the ability to adapt to changing circumstances, such as adding or removing beneficiaries or supporting other family members over time.
The importance of professional advice
Discretionary trusts can be complex to set up and manage but professional advice significantly simplifies the process. Working with an experience financial adviser can help to ensure that:
- The trust is legally valid and tax-efficient.
- Trustees understand their responsibilities.
- Assets are structured in the most tax-efficient way.
Tip: Even if you don’t have a large estate, discretionary trusts can be a valuable tool in protecting family wealth and providing for future generations in a controlled, tax-efficient way.
*Inheritance tax planning can involve complex legal, tax and financial considerations. Before taking action, you should seek professional advice to ensure any strategy is suitable for your personal circumstances.
4. Take advantage of charitable donations
Charitable donations not only offer a generous way to support causes close to your heart, but are also a highly effective strategy for reducing your inheritance tax liability.
How do charitable gifts affect inheritance tax?
In the UK, any gifts that you leave to a registered charity are fully exempt from inheritance tax, no matter how large.
Additionally, if you leave at least 10% of your net estate to charity, the inheritance tax rate on the remaining estate may decrease from 40% to 36%. This is known as the reduced rate for charitable giving and can significantly lower the inheritance tax owed by your beneficiaries.
*Eligibility for the reduced rate is determined under HMRC rules and professional advice may be required.
Types of charitable gifting
There are several ways in which you can structure charitable donation to maximise tax efficiency.
Gifts in your will
Leaving money or assets to a charity in your will is straightforward and ensures that your gift qualifies for inheritance tax exemptions.
Lifetime donations
You can donate to charity during your lifetime, which will remove assets from your estate completely providing you survive seven years.
Charitable trusts
This allows for a more complex gifting arrangement, such as providing for family first and passing the remaining funds to charity while still benefitting from tax reliefs.
Important considerations
When making a charitable donation, there are several important considerations:
Legal structure
If making a gift in your will, ensure that your Will clearly specifies charitable gifts and includes details of the registered charity.
Percentage vs fixed amount
Leaving a percentage of your estate can help to preserve the relative value of your gift should the estate grow over time.
Professional advice
As always, it is strongly recommended that you receive advice from an experienced financial adviser prior to making a charitable donation, who will be able to structure the gift in a way which both maximises tax efficiency and meets your philanthropic goals.
5. Consider a life insurance policy to cover potential inheritance tax liability.
If you’ve already taken steps to minimise your inheritance tax liability but are still expecting your beneficiaries to be left with a tax bill, taking out a life insurance policy may help cover the bill.
How it works
Whilst a life insurance policy won’t directly reduce your inheritance tax liability, it does provide your beneficiaries with a means to pay the tax bill due on your estate.
For example, if you anticipate your inheritance tax bill to be £100,000, you may consider taking out a life insurance policy which pays out £100,000 to your beneficiaries on your death.
To be effective, the policy should be:
- Written in trust, meaning that your payout goes directly to your chosen beneficiaries rather than into your estate.
- Appropriately sized. The policy should match your expected inheritance tax liability. Working with a financial adviser can help you to calculate this.
- Regularly reviewed, to ensure that the size of the payout remains enough to cover your potential bill as your liability changes with your circumstances.
Things to keep in mind
Premium costs
The cost of your insurance policy will vary depending on your age, health and the size of the payout.
Professional guidance
It is important to get advice from a financial planner to ensure the policy is written correctly in trust and fits within your wider estate plans.
Regular reviews
As thresholds, property values and personal circumstances change so it is important to regularly review your insurance policy to ensure it is sufficient to cover your potential inheritance tax liability.
How can Cooper Associates Wealth Management help?
Navigating the inheritance tax landscape can be challenging, with so many options often leading to “analysis paralysis”. Thankfully, our team of expert financial advisers are here to help.
At Cooper Associates Wealth Management, we take the time to truly understand our clients’ unique circumstances, offering bespoke advice tailored to their specific needs and aligned with their long-term goals. This helps us to protect both your wealth and your family’s future.
Get in touch to book a meeting and discover how we can help you optimise your inheritance tax planning strategy and work towards minimising your potential liability today.
*The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority.
SJP Approved xx/xx/xxxx
