Are there ways to avoid paying inheritance tax?
For those who want assets they own to go to their loved ones after they pass away, inheritance tax loopholes in the UK do exist.
Inheritance tax in the UK is usually applied when the total value of an estate (all the assets and possessions a person owns at the time of their death) is above an identified threshold, currently £325,000.
Assets valued at above that figure are taxed at 40%, which reduces how much a beneficiary can receive.
As wills and probate experts, our team shares some of our top inheritance tax planning tips.
What is the loophole for inheritance tax in the UK?
There’s actually a variety of legal ways to reduce IHT, or even avoid it altogether.
How to avoid inheritance tax
- Load pension with cash
One way to avoid paying inheritance tax is to put your money in a pension – a pot of money that gives you a reliable income when you retire.
According to the House of Commons Library, while there’s no overall limit on how much you can contribute to a registered pension scheme; up to £60,000 can be personally contributed into pension schemes without paying income tax in 2025/26.
Any money saved in your pension can therefore be passed on, free from inheritance tax, as it’s not normally considered part of your estate.
The process of doing so is straightforward, and simply requires you to fill out a beneficiary nomination form and include it within your will.
However, from April 6 2027, most unused pension funds and death benefits will be included in the value of a person’s estate for inheritance tax, according to a government consultation outcome on inheritance tax on pensions.
If the value of your pension combined with the value of the rest of your estate (such as your property, belongings, savings, and investments) is below the £325,000 inheritance tax threshold in the UK, you still won’t have to pay inheritance tax.
You can also put money into a family member’s pension (known as a third-party pension contribution) and they will still be able to keep their pension allowance of 100% of their earnings, or £3,600 if they have none.
This means that if their total pension contribution falls below the allowance, any amount can be donated.
The person who holds the pension will then be able to claim a 20% tax rebate and may be eligible to claim the left-over tax by filing a self-assessment tax return.
- Gift money or assets
In line with the current inheritance tax gift rules in the UK, another way to avoid IHT is to simply give money or assets to the beneficiaries of your estate while you’re still alive.
Currently, you can give away up to a total of £3,000 worth of gifts each tax year either to one person or split between several people.
Over time, this will reduce the overall value of your estate, helping you to stay below the £325,000 IHT threshold.
Wedding and civil partnership gifts can also be exempt from IHT – parents can give £5,000, grandparents or great-grandparents £2,500, and others up to £1,000.
Plus, unless the gift is part of a trust, no inheritance tax will be due if you live for seven years after gifting it; this is known as the seven-year rule.
After seven years, the gift no longer counts towards the value of your estate.
Case study: Mrs Jones
Mrs Jones has £700,000 in savings. She wants to give an equal share of £200,000 of this money to her two children.
Using her annual gift allowance, £6,000 is tax-free (£3,000 per child), while the remaining amount of £194,000 is referred to as a potentially exempt transfer (PET), which means it’s only tax-free if she lives seven years after giving it.
By living at least seven years after making this gift, she’ll save £80,000 in IHT – equal to 40% of £200,000.
- Write a will
Writing a will enables you to choose who receives what from your estate and can help reduce any inheritance tax liabilities.
If you pass away without writing a will, government legislation will dictate your assets’ distribution as per the rules of intestacy.
Planning in advance by writing a will is also a good way to get the correct legal advice with regards to tax inheritance and it can ensure that your assets are going to the right place.
For example, charity gifts are exempt from IHT, no matter the gift value. Leaving gifts to charity of at least 10% of the taxable value of your estate to charity will also reduce the overall IHT rate from the typical 40% to 36%.
Leaving your whole estate to your spouse or civil partner also means no inheritance tax is payable in the UK. This is known as spousal exemption and covers any assets that are passed from one spouse or civil partner to the other – with the estate’s size and value having no impact.
- Obtain a deed of variation
A deed of variation is a type of legal document that permits the beneficiaries of a will (or under intestacy rules) to change their entitlement, as if the change came from the deceased.
It can be used as a tax loophole as it operates by preventing the beneficiaries from going over the inheritance tax threshold.
As the will can be changed and the rules of intestacy modified, the beneficiaries can opt out of receiving their share of an estate. Instead, this inherited amount can be transferred to others, such as offspring.
This inherited gift is most used in circumstances where the beneficiaries want their children to benefit instead of themselves, and the gift will be treated as though it were made by the deceased.
- Downsize and donate the cash
Another common tax loophole is to downsize your property.
As inheritance tax only comes into effect at the time of someone’s death, taking into account assets that have been given away in the seven years prior to death, it can be a good idea to downsize to a smaller property.
Whatever is remaining once the larger property is sold can then be transferred to whoever you have selected as your beneficiaries.
If you are considering this tax loophole, remember that if you pass away within seven years of this donation, you will still need to pay inheritance tax, so the timing will need to be considered.
This loophole doesn’t just apply to property, but also to business shares or second homes that are responsible for generating another income stream. This means that you can still donate a larger sum of money to your beneficiaries without incurring a hefty tax fee.
However, it’s worth keeping in mind that there may be other non-inheritance tax related fees to grapple with if you are deciding to go down this path. This may be in the form of capital gains tax on the sale of your investments.
- Release equity with a mortgage
If you’re a homeowner, releasing equity from your home (often through a lifetime or interest-only mortgage) can also help you to avoid inheritance tax in the UK by reducing the overall value of your estate to below the £325,000 IHT threshold.
This is especially important as UK house prices have seen substantial increases over the years, pushing up the overall value of people’s estates.
Not to mention, the capital you release can be used to fund your lifestyle during retirement in addition to your pension.
- Claim Inheritance Tax Residence Nil Rate Band (RNRB)
Applicable for deaths on or after April 6 2017, the IHT RNRB is a type of transferable allowance eligible to married couples and civil partners when they leave their primary residence to certain descendants, such as their children or grandchildren.
It offers a maximum allowance of up to £175,000 per person in addition to the existing £325,000 Inheritance Tax (IHT) nil-rate band for any estates worth less than £2 million.
Essentially, this means the RNRB is deducted from the value of the estate before the general IHT nil-rate band is deducted.
Plus, any unused RNRB allowance from the first spouse is preserved and can be transferred.
As a result, if a husband or wide dies and they leave their estate to their surviving spouse, they’ll benefit from 100% IHT spousal exemption.
As they haven’t used their RNRB allowance (because the estate automatically goes to the surviving spouse), it’s then transferred to the surviving spouse’s estate, offering their children potentially double the family home savings on inheritance tax when the second parent dies.
Case study: The Smiths
Mr and Mrs Smith are a married couple. Mr Smith dies in 2015, leaving everything to Mrs Smith who benefits from spousal exemption and therefore pays no IHT.
Mrs Smith dies in 2025, leaving her estate to their child. When Mrs Smith dies, she owned a house worth £800,000 and investments worth £500,000, resulting in a total estate value of £1.3M.
As Mr Smith didn’t use his IHT NRB tax allowance (£325,000 per person), Mrs Smith has a combined allowance of £650,000.
Added to the £175,000 RNRB for each person, this creates an extra allowance of £350,000. Combining these figures results in a £1M allowance.
Of the total estate value (£1.3M), only £300,000 is therefore taxable at a rate of 40%. In sum, the IHT for Mrs Smith’s estate would be £120,000.
- Transfer assets to a trust
Trusts are another way that you can reduce or avoid inheritance tax.
This is because any money, property, investments or other assets that are transferred into the ownership of a trust and its trustees will be outside of your estate for inheritance tax purposes.
While trusts can be a powerful tool for reducing your taxable estate, the person making the transfer must live for at least seven years after the assets have been placed into trust for them to be exempt from IHT, as per the seven-year rule.
As trusts have specific rules, they also come with potential implications, such as Capital Gains Tax (CGT).
Speaking to an experienced solicitor, like the specialist wills and probate team at Wafer Phillips Solicitors, can help you to understand these implications and make more informed decisions.
- Put your affairs in safe hands
With the team of specialist solicitors at Wafer Phillips, you can enjoy piece of mind when it comes to navigating inheritance tax and many other will and probate matters.
Whether it’s giving advice on inheritance tax and your available options or helping you to make preparations when it comes to your estate or assets, we are here to ensure your hard-earned assets go to the people you love.
Our expert probate practitioners have assisted with a number of probate cases over the course of their legal career, each one boasting more than a decade of experience in the industry.
We can help with the entire probate process – from applying for a ‘grant of representation’ to authorise you to sort out the deceased’s estate to gathering their assets, paying their debts, and then distributing their estate among the beneficiaries.
Our team can also assist in managing the deceased’s estate, which includes belongings, money, and property as well as giving you legal guidance on what happens when probate is not obtained and there is no will.
For personalised advice based on your specific circumstances, speak to our knowledgeable team today on 0151 256 7898.
Alternatively, email your enquiry to enquiries@waferphillips.co.uk or fill out and submit our online contact form.
