You can legally reduce your Inheritance Tax bill through gifting, using trusts, and understanding your tax-free allowances.

Talking about what happens to our money, homes and items after we die is never easy. But planning ahead is important. Without a plan, families can face a difficult financial situation at an already emotional time, especially if they are being hit with a large Inheritance Tax (IHT) bill.

With the current rate of Inheritance Tax sitting at 40% above the nil rate band, it’s no surprise that so many people want to know how to reduce their Inheritance Tax bill.

While IHT can’t be avoided entirely, the good news is that there are some legal ways to reduce or minimise Inheritance Tax, especially if you start planning early.

In this guide, we will talk you through every way you can reduce IHT, including how to avoid paying Inheritance Tax on a property or parents’ house, how gifting works, how trusts can help, and what to do if the tax bill arrives without the money to pay for it.

At Provira, we are here to support our customers through what can be a very stressful time. Our Estate Advances allow executors to access up to 50% of an estate early, so any Inheritance Tax can be paid quickly, efficiently and on time.

Here’s everything you need to know.

What is Inheritance Tax?

Let’s start with the basics: what actually is Inheritance Tax?

Inheritance Tax (IHT) is a tax charged on the value of someone’s estate when they die. An estate includes everything they own, from property to money in the bank, investments and personal items. The standard rate of Inheritance Tax is 40% on anything above the tax-free allowance.

Currently, most people can pass on up to £325,000 without paying any Inheritance Tax at all. This is known as the nil rate band. There is another allowance – the residence nil rate band – which can add up to £175,000 to the tax-free amount if you leave your main home to children or grandchildren. Combined, this gives an estate £500,000 to pass on before paying a penny of Inheritance Tax.

That extra £175,000 makes a big difference to anyone wondering how to avoid Inheritance Tax on a house or how to avoid Inheritance Tax on their parents’ house when they inherit it.

But those aren’t the only allowances. Married couples or civil partners can also combine their allowances, meaning that together they could pass on up to £1 million tax-free.

These allowances are incredibly valuable, especially for families who own property. On anything above that, the 40% Inheritance Tax rule comes into play.

Importantly, Inheritance Tax needs to be paid within 6 months of a person’s death, often before assets can be sold and money can be released. Because of this, many families look for ways to reduce their Inheritance Tax bill, which can be a big financial burden.

Why more families are now planning to reduce Inheritance Tax

Around 6% of estates currently pay Inheritance Tax in the UK. But as the government scrambles to cover its debt, frozen allowances, changes to pension taxes (due in 2027), and rising home values mean that more and more people are now searching for information online about how to avoid paying Inheritance Tax UK-wide.

Whilst avoiding Inheritance Tax altogether is only possible if the estate is below a certain value, there are some other options.

These include:

1. Reduce Inheritance Tax through gifting

Gifting during your lifetime is one of the easiest ways to reduce the value of an estate and therefore the tax that may be due on it.

People often ask if you can avoid Inheritance Tax on a property by gifting it to children. This can work, but only if you fully give up the benefit of living there. If you continue living in the house after gifting it, you must pay full market rent. Otherwise, HMRC will still treat the property as yours.

There are also rules that allow you to gift money every year tax-free. Currently, you can give up to £3,000 every year without affecting your Inheritance Tax position. Small gifts of up to £250 per person per year are also allowed. Regular payments from your salary, like helping pay your grandchild’s rent, are also allowed and commonly used to lower the value of an estate.

Bigger gifts can also be made, but with a condition known as the seven-year rule. If you are still alive seven years after the gift is made, it becomes completely free of Inheritance Tax. However, if you pass away within seven years, then it may be pulled into the estate. This rule is important for anyone looking to avoid paying Inheritance Tax on savings or business income.

You can find out more about the seven year rule in our blog here.

2. Make a proper will

Taking the time and advice to write a proper will is one of the best ways to reduce or avoid paying Inheritance Tax. Without a will, it’s the law that decides who inherits what, and this can drive up the amount of tax paid dramatically.

People regularly ask ‘how do you avoid Inheritance Tax on a property?’ or even ‘how to avoid Inheritance Tax on UK property if leaving it to a partner?’. The answer is simple: if you are legally married or in a civil partnership, your partner can inherit the estate entirely tax-free.

However, if a partner is not a legal spouse or civil partner, they do not automatically benefit from tax-free inheritance rules. In this case, having a will protects them and lays out what assets they are entitled to.

At Provira, we recommend that a will is reviewed when circumstances change: new relationships, separation, divorce, buying a new house or the birth of grandchildren. The earlier and more clearly you plan, the easier everything is later on.

3. Leave everything to a spouse or civil partner

One of the easiest ways to avoid paying Inheritance Tax is to leave everything to your partner. In the UK, married couples and civil partners can leave everything to one another completely tax-free.

On top of this, the unused allowance of the first partner to die can be transferred to the second. This is how many families avoid Inheritance Taxes completely until both parents have passed away. At that point, up to £1 million can be left tax-free to children and grandchildren, which may be enough to cover the value of the estate.

Importantly, this does not apply to unmarried partners, regardless of how long they have lived together or shared a home.

4. Leave some money to charity

One of the best legal ways to reduce your Inheritance Tax bill is to leave 10% of the estate to a charity. 

If you do so, the rate of tax you pay above your allowances drops from 40% to 36%. Whilst this may not seem like a huge amount, it can make a big difference, especially for larger estates.

How to avoid paying Inheritance Tax on a property

Property, given it’s a high-value asset, often creates the largest tax bill, which is why search terms like ‘how to avoid Inheritance Tax on house’ or ‘how to reduce IHT on a property’ are so common.

The key things to know about avoiding Inheritance Tax on a property are:

• You can leave your home to children or grandchildren if you want to use the residence nil rate band and unlock an extra £175,000 tax free.
•  If you are married or in a civil partnership, you can leave your home to your significant other entirely tax free.
• If you aren’t married but live with a partner, thinking about a joint ownership structure may allow them to retain their half without paying taxes.
• It’s important to think ahead about downsizing, though depending on the value, some tax may still have to be paid.

If you are wondering how to avoid Inheritance Tax on parents’ house, the most important first step is to speak to a professional to understand the best way to manage your personal situation.

Trusts as a way to minimise Inheritance Tax

Trusts might sound like something only the super wealthy use, but they can actually be a great way to avoid paying Inheritance Taxes. This is because trusts sit outside of a person’s estate, which means they aren’t liable for Inheritance Taxes.

However, when it comes to trusts, there are a lot of options, and whilst they may be a great way to avoid Inheritance Taxes, they might leave beneficiaries liable for other taxes. 

Because of this, we always recommend getting financial advice from a professional before setting up a trust.

Use life insurance to settle the tax bill

If the value of your estate is above your allowance, then the truth is that Inheritance Tax can’t (and shouldn’t) be avoided. However, one thing you can do is take out a life insurance policy to help your family members pay the taxes.

If the life insurance policy is written into trust, it is counted as separate from the estate and can be used to pay the Inheritance Tax quickly, making probate easier.

This doesn’t reduce Inheritance Tax itself, but can stop it being a financial burden.

Pensions and “what to do with inheritance money to avoid taxes”

Many people ask what to do with inheritance money to avoid taxes. One useful option is pensions. A pension that has not been drawn may be passed on tax-free in some cases, however, this might change in 2027.

Speaking to a professional and looking at your pension as part of your plan can help reduce Inheritance Tax or give your family a helping hand in paying for it.

When Inheritance Tax must be paid before the estate is accessible

Even if every step above has been followed, one of the biggest problems families come up against is that HMRC expects inheritance tax to be settled within six months of death. The problem is, probate can take nine months or more, meaning the funds to pay the taxes might be locked up in the estate.

How Provira can help

Provira specialises in supporting families who need to pay Inheritance Tax or other estate costs before probate is completed.

Our Estate Advance gives executors fast access to up to 50% of the estate’s value, usually within days, without personal guarantees, monthly payments or early repayment fees. We charge simple interest (never compound), meaning we never let the loan grow out of control.

The advance is only paid back once the estate assets have been released, meaning families can have a bit of breathing room when they need it most.

If you are navigating how to avoid paying Inheritance Tax or need help paying an Inheritance Tax bill, our team is here to guide you through the process and answer any questions.

You can read more about our Estate Advance here or apply online through this form.

Reducing your Inheritance Tax bill

When planning for the future, it’s natural to think about what you can do to reduce your Inheritance Tax bill.

Early planning, being proactive and understanding the options available can be a great way to protect what you’ve built and ease the financial burden for your family.

And if tax needs to be paid before the estate can be accessed, you don’t need to navigate that alone.

Provira is here to help families through every step of this process, our compassionate team will be with you every step of the way. Get in touch today to find out how we can help.

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