How to Avoid Inheritance Tax Using These Proven Methods

How to Avoid Inheritance Tax Using These Proven Methods

If you want to learn how to avoid inheritance tax, one of the easiest ways you can go about it is to give away or spend part of your wealth. There are also several types of gifts you can give during your life that will not be taxed. There are actually a few great options you can try in order to prevent your loved ones from having to pay a steep forty percent inheritance tax on anything that is willed to them after your death.

Read on to learn more.

Gifting Your Wealth

As we mentioned, giving gifts to your loved ones is a great way to avoid inheritance tax. There are several different types of gifts that you can make during your life, yet there are also some that won’t immediately fall into the tax-free list, however, they can potentially be tax-free just as long as you give them to family and friends seven years prior to your death.

These types of gifts are referred to as PETs or potentially exempt transfers. Most of the gifts you give people will fall into this category.

Use Equity Release in Order to Reduce Your Estate

If the majority of your wealth is tied up in property, then you might not be able to spend your wealth on yourself or use them as gifts during your lifetime. In order to get around this, you can take out an equity release scheme. Keep in mind that in order for this to work you must reduce your liability toward the HMRC by increasing the amount of debt you owe to your mortgage provider.

With this type of scheme, you’ll be able to borrow money against the value of your property or home. You can also sell a portion of your home or property at a reduced market rate as you remain living at that particular home for the remainder of your life. This is referred to as a home reversion scheme.

The amount of money you release can be spent or passed on to family and friends, however in order to prevent your family from paying an inheritance tax on the funds you must live for seven years.

After Death

After your death, with a lifetime mortgage, the value of your estate will be reduced by the mortgage debt. With a home reversion scheme, only part of the value of your home will belong to your estate.

Estate Planning

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While it may sound simple, you should carefully consider your options before choosing this route in order to avoid inheritance taxes. Your debt can grow very quickly if you choose a lifetime mortgage since the interest is rolled up.

As an example, if you have a fifty thousand pound mortgage that has an interest rate of seven percent annually, then it will almost double within a period of ten years. This means you may end up owing more to the mortgage provider than your estate would end up paying in taxes.

When you choose the other option, you’re selling off a portion of your home at a price that’s less than what it’s actually worth. Because of this, you should consider whether or not it’s worth it to allow the bank to take a large chunk of your home just in order to prevent the HMRC from taking a piece of the pie after your death.

What it all really boils down to is careful planning prior to your death. If you’re not sure how to get your finances together in order to ensure your loved ones will be taken care of after your death, then it’s time to meet with a financial advisor. These professionals can explain what your options are, how your family can avoid paying big in taxes, and exactly what you need to do to put your affairs in order.

To learn more, click here to read our article on estate planning tips.


ISAs can be inherited, and if done right, your beneficiaries won’t be hit with taxes left and right. An ISA allows you to save for the future and if done right, you can deposit approximately twenty thousand pounds a year. If you want to will your ISA to a partner, then there are ways you can go about so your loved ones are not hit hard with taxes.

To learn more, click here to read our guide on ISAs.

 Insurance Policies

Insurance policies referred to as whole life policies are written under a trust for your heirs. This is another great option and one that can help your family to easily handle the inheritance tax bill after your death. The point here is to take out a policy that pays out enough to cover the cost of inheritance tax. The HRMC will treat the premium paid to the insurance as a lifetime gift, should the policyholder pay into it themselves. However, these can often be covered by a type of tax-free exemption.

You can also choose to put your life insurance into a trust if you have a policy that you want to be paid to your heirs after your death. A policy that’s under a trust will not count toward your estate once the inheritance tax bill has been worked out.

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