Keeping on top of inheritance tax

Last updated: March 2021 | 2 min read

Inheritance tax can come as a surprise to some people who may find a portion of their estate lost in tax. However, with little planning, you can reduce the amount of inheritance tax that will be payable. This article will take you through how you can reduce the tax and maximise your inheritance.

What is inheritance tax?

Inheritance tax is payable on the estate of a deceased if it is more than £325,000. The amount above this threshold is subject to 40% tax. If the value of the estate is less than £325,000, then you do not have to pay any inheritance tax.

What is the nil-rate band?

The nil-rate band is the amount that the estate can worth up to without having to pay inheritance tax. Currently, the nil-rate band threshold is £325,000.

Further, you can inherit from a dead spouse or civil partner without having to pay inheritance tax. Additionally, you can also inherit your spouse's or civil partner's unused nil-rate band. However, you should note that you can only pass on the unused percentage of the nil-rate band.

Inheriting parental home – inheritance tax

If you are the deceased's direct descendant and the property you are inheriting is their main residence, then the amount of inheritance tax will be reduced.

The way that works is that you are granted an allowance of inheriting £150,000 worth of property from your direct ascendants tax-free. This is called the "Main Residence Nil Rate Band". This amount is then added to the Nil Rate Band. In simple terms, you can inherit your parent's or grandparent's home without having to pay inheritance tax if the property is worth up to £475,000.

How you can reduce your inheritance tax bill

There are legitimate and legal ways of reducing your inheritance tax bill. The most effective of them are as follows:


If you make gifts during your lifetime, you can gradually reduce the size of your taxable estate. However, the rules regarding gifts are quite complicated, and not all gifts will reduce inheritance tax in every circumstance.

You are allowed to gift up to £3,000 in a single tax year. You can also carry forward unused exemption from the previous tax year.

There is an inheritance tax exemption on wedding gifts. For instance, your parents can gift you £5,000, grandparents £2,500 and anyone else up to £1,000. Additionally, you can make gifts up to £250 to any individual.

If you are making larger gifts, then inheritance tax is not payable if you die after 7 years or more. However, if you die sooner, then a reduced inheritance tax may be payable if you die between 3 and 7 years of making the gift.

Give to charity

Gifts to charities are not subject to any inheritance tax. Furthermore, if you leave a minimum of 10% of your estate to charity, then only 36% inheritance will be payable on your estate.

Pension pots

Generally, pension pots are completely tax-free if you pass away before the age of 75. However, if you pass away later after 75 years of age, then pension pots are charged at your beneficiaries' marginal rates.


Through a trust, you take your assets outside your estate, reducing the amount of taxable inheritance.

Life insurance

Life insurance is an excellent option to help your beneficiaries with the inheritance tax bill. You can find life insurance policies designed to pay the inheritance tax bill.

Click here to learn more about inheritance tax.

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