How to reduce how much Inheritance Tax you need to pay

New figures from HMRC have revealed the rising costs of Inheritance Tax (IHT) to thousands of families around the UK. The latest data shows IHT receipts for April 2024 to February 2025 were £7.6 billion, which is £0.8 billion higher than the same period last year - as a combination of frozen tax thresholds and increased interest on late payments continue to saddle families with the hefty - and often overlooked - tax.[1]

Fortunately, there are a number of ways that you can minimise paying Inheritance Tax by making some simple changes to how you manage your finances. This is especially important if you’re later on in life, as your ability to reduce your IHT liability by gifting some of your assets to family and friends tapers off in the 7 years preceding your death (more on this later).

We’ve rounded up four of the easiest ways you can shield money from the taxman and reduce your Inheritance Tax liability. But first, let’s quickly recap – what's going on with IHT and how exactly does it work?

What’s going on with Inheritance Tax?

This recent rise in Inheritance Tax payments, which reached a peak in June 2023 with the highest monthly total on record, is being driven by a number of different factors.

With still-high interest rates and challenging house prices, more and more people are finding that their estates surpass the nil-rate band – currently frozen at £325,000 until at least the 2027-28 tax year. This has also combined with the higher interest rates on late IHT payments, following increases to the base rate from the Bank of England, all culminating in more grappling with late payment fees as well.

Commenting on the statistics, Stephen Lowe, Group Communications Director at retirement specialist Just Group, explains:

Halfway through the tax year, the continued increase in IHT receipts comes as no surprise. With thresholds frozen and property prices still climbing, more estates are being drawn into the scope of IHT.

Stephen LoweGroup Communications Director, Just Group

With only weeks left to go before the Autumn Budget, Lowe warns that IHT rules could come under fire by the new Labour government and to pay close attention in case rumoured changes come to fruition.

Ahead of the much-anticipated Autumn Budget, rumours abound that Inheritance Tax could be under review as the government looks for ways to boost revenue and fill its fiscal ‘black hole’. Whether or not changes are introduced, it’s vital that people understand where their estate stands in relation to the current IHT threshold.

Regularly reviewing the value of an estate, particularly with property valuation in mind, can help individuals to understand their position relative to the tax threshold, enabling them to plan more effectively.

Speaking to a professional, regulated adviser can not only help manage any potential IHT exposure but it can also give peace of mind, allowing individuals to feel more confident about financial plans for their later years.

Stephen LoweGroup Communications Director, Just Group

What is Inheritance Tax?

Inheritance Tax is a tax that your family members have to pay to the UK government if the value of your belongings, property and money (known collectively as your ‘gross estate’) exceeds a certain threshold when you pass away. This threshold – currently £325,000 - is called the ‘nil-rate band’ and any amount above this is liable for Inheritance Tax.

The nil-rate band can extend to £500,000 if you’re leaving your main property to kids or grandkids thanks to what's called the 'residence nil-rate band' - or more commonly the 'residence allowance', but only if your estate is worth less than £2m. On estates worth more than this, the main residence allowance gradually tapers down. You can read more details about this on the gov.uk website here.

Inheritance Tax is usually charged at 40% of the amount which exceeds the nil-rate band. However, it can be reduced to 36% if you leave at least 10% of the taxable portion of your estate to a charitable organisation, such as an animal shelter or an amateur sports club. By making a donation in this way, you're reducing how much of your estate your beneficiaries receive when you pass away, but you're also reducing the size of the tax bill they face in the process.

The example below can help you understand how this works in practice.

How does Inheritance Tax work?

For example, if your overall (gross) estate is worth £500,000 and you're not leaving your main residence to your kids or grandkids, the bill payable by your beneficiaries would be:

However, if you left 10% of the taxable portion of this same estate to a charity, you would qualify for the reduced rate of 36% and the IHT bill for your beneficiaries would be:

The above calculations are for illustrative purposes only. The gov.uk website has a helpful Inheritance Tax reduced rate calculator where you can input your own numbers for a more tailored answer. You can find it here.

You can further reduce your Inheritance Tax liability by gifting assets to family or friends. There’s no IHT to pay on any gifts given to spouses or civil partners at any point during your lifetime. But - and this is a big one - gifts given to anyone else in the 7 years preceding your death are liable for Inheritance Tax, the rate of which tapers depending on their value and when they were given. This is called the 7 Year Rule and we explain this in more detail here.

The rules around Inheritance Tax can be complicated and often make up a significant portion of retirement planning. To learn how it works in more detail, head over to our full guide below for more on who pays IHT, when you need to pay it, which assets are exempt and more.

Four ways to reduce Inheritance Tax