How to avoid paying inheritance tax

Holly Thomas / 23 July 2014

Families could save themselves tens of millions of pounds in tax bills by setting up policies that help avoid paying inheritance tax.



Research from unbiased.co.uk, shows as much as £530 million is set to be wasted in inheritance tax (IHT) this year by those who fail to place life protection policies ‘in trust’. This is £58 million more than last year.

Not putting the policy in trust could reduce a £100,000 life insurance pay out by as much as £40,000 if an individual's estate is worth more than £325,000, leaving a loved one at risk of a sizeable tax bill.

With rising house prices and a more buoyant economy, improving investment values are set to leave more and more taxpayers exceeding the £325,000 inheritance tax-free threshold set by the Government. 

The amount of IHT paid by British families is rising; IHT raised in the tax year 2012/13 was £3.104 billion, with the provisional estimate for 2013/14 at £3.423 billion.

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Trusts can be used for your savings as well as for life insurance payouts. You can select for beneficiaries to receive all, or specific amounts, of the money at the trustee’s discretion.

Reducing inheritance tax

There are lots of ways to reduce an IHT bill aside from using trusts:

  • You can normally give away up to £3,000 each tax year which is exempt from inheritance tax free. If you haven't used this annual exemption during the previous tax year, it can be carried over into the next tax year. 

  • There is also a small gifts exemption, which allows you to give up to £250 each to any number of people each tax year, although it can't be the same person who received a gift from the £3,000 annual exemption.

  • If you make gifts over and above these exemptions, they may still be free from inheritance, as long as you are still living seven years from the date that money exchanges hands.

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Experts highlight that keeping a record of any gifts you make and noting which exemption you've used will make administering your estate easier.

If you have complicated affairs or want to set up a trust, it’s important to seek advice. Research from unbiased.co.uk reveals only 27% of consumers would be confident in tackling inheritance tax planning without the help of a professional financial adviser.

The rules on pensions changed in April 2015 allowing full access to pension funds without today’s hefty tax penalties of 55%. Tax now applies at a marginal rate.

The tax rate on drawdown funds inherited will also be lower than 55%.

Read our guide to reducing inheritance tax.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.