5 steps to strategically reduce your inheritance tax liability in 2025
Inheritance tax (IHT) is not something that many people think about until it is too late. However, the good news is that with effective planning, inheritance tax bills can be significantly reduced or even eliminated.
What is inheritance tax?
Inheritance tax is charged on the value of your estate — your estate is everything you own, such as your property, savings, investments, and other assets.
In the UK, everyone has a £325,000 nil-rate band, meaning no tax is paid on the first £325,000 of your estate.
If you leave your home to your children or grandchildren, you may also benefit from a £175,000 residence nil-rate band, meaning you can shelter up to £500,000 from inheritance tax.
Anything in your estate above these allowances is usually taxed at 40%.
Below are 5 steps to consider to reduce your inheritance tax liability.
1. Make gifts during your lifetime
One of the simplest ways to reduce your taxable estate is to start giving money away. There are several gifting allowances that you can take advantage of in the UK.
· Annual gifting allowance: You can gift up to £3,000 per tax year as well as carry forward any unused allowance from last tax year.
· Small gifts: you can give unlimited gifts of up to £250 per person per year, provided you haven’t used another exemption for that person.
· Wedding gifts: Parents can give £5,000 and grandparents can give £2,500 free from inheritance tax to contribute towards a wedding.
· Potentially Exempt Transfers (PETs): Larger gifts are free from inheritance tax if you survive seven years after making the gift.
2. Use trusts to move assets out of your estate
At Borealis Financial Planning we can advise you on various types of trusts. Trusts can be used as a way to control who benefits from your assets and when they can be accessed. By placing assets into trust, you are removing them from your estate and therefore reducing your inheritance tax bill.
Trust planning is a complex area and seeking financial advice can be invaluable.
3. Keep assets in your pensions
Many people are unaware that currently pensions are outside of your estate and therefore exempt from inheritance tax meaning they are a tax-efficient way to pass on assets to your loved ones. Although this is set to change from April 2027.
It is important that you complete an Expression of Wish form for all of your pension providers to nominate who you wish to inherit your pension when you pass away as your pensions are not included in your Will.
4. Use life insurance to pay the inheritance tax bill
The inheritance tax bill must be paid by your executors before they can access any assets inside of your estate. Meaning that you cannot just leave them cash or assets to sell to cover the bill. They have to fund it first.
An easy way to protect your family and provide them with the funds to pay the bill is by taking out a whole-of-life insurance policy written in trust. This means that when you pass away, the payout will be paid into a trust which is not inside of your estate. This means that your executors can access the funds immediately and use them to settle the IHT bill.
Premiums are cheaper the younger you are when you take out the policy.
5. Leave a legacy to charity
If you leave 10% or more of your estate to charity, the inheritance tax rate on the rest of your estate drops from 40% to 36%. This means that you can support causes you care about while also reducing your IHT bill.
Ready to reduce your inheritance tax?
At Borealis Financial Planning, we specialise in helping individuals and families plan for the future. We’ll build a clear, tailored inheritance tax plan to help you to leave more of your legacy to your family rather than to HMRC.
Book a no-obligation meeting now to find out how we can help you and your family
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
SJP Approved 01/09/2025