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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
The government’s inheritance tax (IHT) take is continuing to rise, with it collecting £8.2bn in the 2024/25 tax year – the fourth year in a row of increased takings. And it’s due to rise even more, when unused pensions become taxable from April 2027. So is it time to consider some more unusual ways to reduce a future IHT bill?
Rob Morgan, chief investment analyst at Charles Stanley, says: “The annual allowance of £3,000 and the small gifts allowance of £250 are well-known IHT planning options. But, for many people, these won’t even touch the sides.”
Here are some lesser-known ways to reduce a future IHT liability.
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If you’re in the fortunate position to have more income than you need, the regular gifts out of surplus income IHT exemption can be an effective way to get potentially large amounts of money out of your estate instantly.
There’s no limit on how much you can give, as long as it doesn’t affect your standard of living, it’s a regular gift and it comes from income rather than capital.
Despite this, a freedom of information request from Quilter Cheviot found that just 480 estates – less than 2% of those liable for IHT – had taken advantage of this exemption in the 2021/22 tax year (the most recent year for which figures are available).
David Denton, head of technical services at Quilter Cheviot, says: “Lots of people could take advantage of this exemption but most don’t even know it exists.”
The key to making these regular gifts count is to document them. “Write a letter explaining your intentions but also get hold of form IHT403 from HMRC and record these gifts,” he adds. “That ensures they aren’t overlooked by your executors.”
There’s no IHT to worry about with gifts to charities. And did you know that the same exemption also applies to gifts to registered community amateur sports clubs, political parties (with at least two MPs), as well as institutions such as national museums and universities?
Your loved ones may also benefit if you leave at least 10% of your net estate to charity in your will, as Morgan explains: “Do this and it’ll reduce the IHT rate from 40% to 36%. It can pay for itself.”
It’s not always easy giving away your wealth, even if you don’t need it. Fears around how they’ll spend it or whether a messy divorce will see it disappear with an ex-spouse can make gift-givers nervous.
If this is the case, Robbie Hewitt, wealth planner at Brown Shipley, says a trust may be worth considering. “A trust can give you more control over how your money is distributed. Discretionary trusts are the most common but there are different structures you can use, depending on your needs and planning objectives.”
As an example, he points to a loan trust. With these, you loan a trust a lump sum, which you can access whenever you want, but any growth is immediately outside your estate.
The additional control you get with a trust does come at a cost. Hewitt explains: “There’s potentially tax within the trust and exit charges when any capital is distributed. And, like any gift, it still takes seven years for anything you put in trust to be outside your estate for IHT purposes.”
Even with the residence nil rate band (£175,00), high house prices mean it’s often tricky to pass on your home without leaving an IHT liability.
Duncan Mitchell-Innes, partner and deputy head of the private client team at TWM Solicitors, says: “If you give away your home but stay living there, it’s known as a gift with reservation. This means it’s treated as still being in your estate for IHT purposes.”
To avoid this, you need to pay rent at the market rate to the person to whom you gave your home. While this could be another way to reduce your estate, it comes with potential catches.
David Fenwick, technical lead for probate at Co-op Legal Services, which partners with Saga Legal, says: “The new owner would be liable for income tax on the rent. This additional income could also affect their eligibility for child benefit.”
There is one situation where you could pass on some of your home without creating any tax nasties. “If you live with someone and they plan to stay living there, you can give them a share of the property.” However, he stresses: “It’s still regarded as a gift, so you’d need to live for seven years for it to be outside your estate.”
Life insurance has always been an option for covering IHT liabilities, but interest has boomed over the last year. Independent protection adviser LifeSearch has seen a 225% increase in enquiries since the 2024 autumn Budget.
Hewitt has also seen more interest from clients. “Many people like the idea of insuring a future liability,” he says. “It buys more time and gives you more flexibility.”
Seven-year policies are available to cover gifts, but the most common option is a whole of life policy. These pay out on death, providing premiums have been maintained. Hewitt adds: “Make sure your policy is in trust. It’s easy to do and it ensures the payout is outside your estate and available to settle a future IHT bill.”
Even someone who doesn’t believe in marriage could be lured down the aisle when they realise how much IHT it could save them. Civil partnership also offers the same benefits.
Mitchell-Innes explains: “Married couples and civil partners can take advantage of the spouse exemption which allows everything to pass between them IHT-free. It’s hardly romantic but it might stop you having to sell the house to settle an IHT liability.”
A high-profile example of this is comedian Ken Dodd, who had his last laugh at the expense of the taxman when he married his partner of 40 years two days before he died. His estate – worth around £28 million – went to his new wife, saving more than £11 million in IHT.
Theoretically you could even marry a friend to save on IHT.
If you’re lucky enough to live in a stately home or have a particularly important collection of artworks or antiques, you might be able to take advantage of the IHT exemption for heritage assets.
This allows you to leave them IHT-free, but there are conditions. “It must have value to the nation, and it will need to be listed and available for the public to view,” explains Denton. “It may be possible to list a classic car collection or an artwork, but most people will know if they’re able to take advantage of this exemption.”
To give you an idea of what qualifies – or perhaps just to inspire a day out – all heritage assets are listed on the HMRC website.
If you’ve failed to uncover any long-lost heritage assets in the attic, don’t despair. Possibly the simplest and most pleasurable IHT planning strategy is to spend it. Although you have to be careful you don’t run out of money, spending it can be an effective way to instantly reduce your estate for IHT purposes.
Just be aware that if you treat others, it may be considered a gift and stay in your estate unless you live for seven years. Or make it a regular thing and take advantage of the gifts out of surplus income IHT exemption.
We partner with Co-op Legal Services to offer advice and services for you and your family.
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