November 2025
Inheritance Tax (IHT) can take a significant portion of your Estate, but with the right planning, much of it can be reduced or mitigated altogether.
For example, to reduce your IHT liability, you can make use of allowances, Lifetime Gifts and the Residence Nil-Rate Band, helping more of your wealth go to your loved ones instead of the taxman.
In this guide, we’ll explain how Inheritance Tax works, who pays it, the key thresholds and allowances, and the practical steps you can take to protect your family’s wealth.
For friendly, professional advice tailored to your circumstances, speak to Redwood Financial today.
Understanding how Inheritance Tax works
Inheritance Tax (IHT) is charged on the total value of your Estate (your property, money, and other assets) when you pass away. It is paid to HM Revenue & Customs by the Executors of the Estate before anything is distributed to beneficiaries.
The standard Inheritance Tax rate is 40% on the portion of your Estate above a certain threshold, known as the Nil-Rate Band. At the time of writing, the threshold is £325,000 per person, which is fixed until April 2030.
Spouses and civil partners can combine their allowances, meaning they can pass on up to double before any Inheritance Tax is due. When one partner dies, any unused portion of the Nil-Rate Band can be transferred to the surviving spouse.
Inheritance Tax Planning is essential so that you understand the tax treatment and take action to reduce your IHT bill as much as possible.
7 ways you can significantly reduce your future Inheritance Tax Bill
1. Ensure you have a valid Will
Having a valid Will is the critical starting point to Estate Planning. If you don’t have one, there is no time like the present – get help with drafting a Will today. If you do have a Will, review it regularly to ensure it is up to date and valid.
Many couples set up Mirror Wills with their spouse or civil partner, which means they leave their Estate to the other in the event of their death. However, depending on your individual circumstances, it may be beneficial to transfer some other assets directly to children or grandchildren after the first death.
While a basic Will is ideal for making sure your legacy goes to the people you choose, comprehensive Estate Planning offers greater protection. Redwood Financial can help ensure your Will is accurate and tax-efficient, protecting your family’s legacy.
2. Claim the Residence Nil-Rate Band (RNRB)
The RNRB is a tax-free allowance that reduces the Inheritance Tax bill if you leave your family home to direct descendants. The maximum RNRB at the time of writing is £175,000 per person, and can be added to the Nil-Rate Band. This means you can pass on up to £175,000 of your home’s value tax-free, on top of the standard £325,000 Nil-Rate Band. If you are married or in a civil partnership, these allowances can be combined, meaning up to £1 million can be passed on without paying Inheritance Tax.
3. Update your life insurance policy to cover the IHT bill
Life Insurance is an overlooked, underused and yet cost-effective solution to reduce Inheritance Tax. Let’s assume there is an Inheritance Tax liability on your death of £100,000 – you could simply choose to take out a life-insurance policy for £100,000.
As long as it is the right type of policy, paying into the right type of Trust, it will provide the money to your beneficiaries on your death so they can pay the Inheritance Tax from the life insurance proceeds and don’t have to find the money to pay the tax bill themselves.
We often find that clients pay far less in life insurance premiums than they ever do in Inheritance Tax, but of course, it depends on your age and health.
4. Give your assets away
You can choose to transfer wealth before you pass away; however, there are two important rules to be aware of.
First is the Seven-Year Rule, which says that if you give away some of your wealth, then in order for that wealth to be outside of your Estate for Inheritance Tax purposes, you need to survive for seven years after the gift has been made.
Second is the Gift with Reservation of Benefit Rule, which says it must be a true gift. If you give some of your assets away, for example, you sign your house over to your children before you die, then you cannot reserve any benefit or use of that house.
You would have to pay your children the full market rent value to continue living in the property, and you cannot receive any of that rental back as a gift from your children. If you do, then the seven-year clock doesn’t even begin to tick, and the value of your property or any money you have received will be counted back into your Estate for the purposes of Probate upon your death.
While giving away your wealth might seem an attractive solution to reduce an Inheritance Tax liability, it is vital to do this in a safe and secure way. To consider another example: you decide to give a cash gift to your married daughter who later divorces. The money you gifted will be treated as part of her assets and may need to be shared with her ex-partner as part of the divorce settlement.
To protect against risks like divorce or debt, gifts can be placed in a Protective Family Trust, safeguarding them for your intended loved ones.
5. Inheritance Tax-friendly investments
Investments can also be an excellent way to reduce Inheritance Tax. The Government offers a range of investments that qualify for IHT exemption, but they are not available from high street banks or building societies. These are true investments into the market, so it’s important that you take specialist investment advice from a specialist Financial Adviser. They will ensure your investment strategy aligns with your appetite for risk and needs, including whether you need access to capital, income, or both, and what level of growth you expect.
6. Join the SKI Club: Spend the Kids’ Inheritance!
If you have more money than you need to look after yourself for the rest of your life, you may want to consider spending some of that wealth now, on things that you enjoy, such as booking a holiday of a lifetime. Think of it like there is a permanent 40% sale on everything! Every time you spend £10,000 of your money, that’s £4,000 that won’t be going to HMRC.
Or, you could consider spending your wealth on your beneficiaries now, while you can see the amazing effect it will have on their life. And your loved ones can enjoy it without grief or guilt, as you’ll still be around.
Again, if you intend on doing this, you must do it safely, and the best option is to do it through a Protective Family Trust. There is a whole range of different Trusts, such as:
- Education Trusts, which can pay for your children’s or grandchildren’s private school fees or higher education.
- Deposit Trusts to help your loved ones get on the property ladder.
- Mortgage Trusts, which allow you to pay off your adult child’s mortgage for them.
7. Make use of Lifetime Gifts
Lifetime Gifts can be a powerful way to reduce the net value of your Estate for Inheritance Tax purposes while keeping those gifts safe for the next generation.
You can give up to £3,000 each tax year under the annual exemption, and up to £250 per person for smaller gifts. Regular gifts from surplus income are also tax-free, as long as they don’t affect your standard of living.
Larger gifts can become potentially exempt transfers if you survive for seven years after making them. Keeping records and seeking expert advice is essential.
Get professional advice for Inheritance Tax planning from Redwood Financial today
As professional Estate Planners, Redwood Financial is passionate about helping families grow, protect, and enjoy their wealth. With years of experience and thousands of happy clients, our service offers genuine care as well as expertise.
Our approach to Estate and Financial Planning is holistic, helping tackle your Inheritance Tax liability on both fronts. We will do all we can to legitimately mitigate your Inheritance Tax bill and save your beneficiaries up to 40%.
Our Inheritance Tax Planning Webinar is a great place to start. For personalised advice, do not hesitate to contact us today.
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