How to Reduce or Avoid Inheritance Tax in 2025

Introduction

Inheritance Tax (IHT) is often dubbed the “voluntary tax” — not because people enjoy paying it, but because, with the right planning, much of it can be mitigated. Yet in 2025, it’s become more complicated than ever to navigate.

The UK government’s Autumn 2024 Budget introduced reforms that will affect how much families can shield from inheritance tax using traditional reliefs. So, what’s still possible, and what has changed?

This guide explains how to reduce — or completely avoid — IHT in 2025 and beyond, with clear, UK-specific strategies tailored to the new rules.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who’s passed away. Currently:

• The standard IHT rate is 40% on estates above £325,000.

• If you leave your home to a direct descendant, you may benefit from an extra £175,000 residence nil-rate band — bringing a couple’s total allowance to £1 million.

• But assets above that can be taxed heavily unless structured smartly.

Strategy 1: Understand What You’re Working With

Before doing anything, get a clear view of your estate:

• Nil-rate band: £325,000 per person.

• Residence nil-rate band: £175,000 per person (if passing a home to children or grandchildren).

• Total potential tax-free estate for couples: £1 million.

Everything above this? Taxed at 40%, unless exempted through gifting or reliefs.

Example: A couple leaving a £1.5 million estate, including their home, would potentially face tax on £500,000 — resulting in a £200,000 IHT bill if not planned properly.

Strategy 2: Use Your Allowances and Make Strategic Gifts

Gifts are one of the simplest and most effective ways to reduce your taxable estate — and they’re still fully available in 2025.

Key tax Free Gift Allowances:

Type of Gift	Annual Limit
Annual Exemption	£3,000 per person
Small Gifts (under £250)	Unlimited (to different people)
Wedding Gifts	£5,0000 (Child), £2,500 (Grandchild, £1,000 (Other)
Gifts between Spouses	Unlimited
Gifts to Registered Charities	100% Tax Free

The 7 Year Rule:

If you survive seven years after making a gift, it’s fully exempt from IHT. If you die within 3–7 years, taper relief may reduce the tax payable.

Example:

Gift your grandchild £50,000 today. If you live for 7 more years, that £50,000 is fully exempt — saving £20,000 in IHT.

If you had not used your £3,000 Annual Exemption in the year of the gift or the previous year, they could also be applied reducing the taxable liability.

Strategy 3: Make Use of Trusts and Reliefs

Updated for April 2026: Autumn Budget Changes

Many families have historically used Business Property Relief (BPR) and Agricultural Property Relief (APR) to pass on wealth free of IHT. However, these strategies are changing.

As a result of the 2024 Autumn Budget, starting 6 April 2026, new limits apply:

• 100% relief on business and agricultural assets is now capped at £1 million per person.

• Assets over £1 million only qualify for 50% relief, meaning 20% IHT is payable on the excess value.

• AIM-listed shares relief reduced to 50%, with no cap for 100% relief anymore.

• Trusts holding BPR/APR assets are now subject to the same cap per trust, not per beneficiary.

  
  

Example:

You own a family farm worth £3 million:

• First £1 million: 100% relief (no IHT).

• Next £2 million: 50% relief → £1 million exposed to 40% IHT = £400,000 tax liability.

What You Can Do:

• Get up-to-date valuations of your business or farm assets.

• Use trusts wisely — but be aware of new restrictions.

• Consider using life insurance to cover potential IHT due above the cap.

• Begin succession planning sooner to lock in reliefs under the current rules.

Strategy 4: Charitable Giving & Life Insurance

Charity and protection remain powerful tools.

Charitable Giving:

• Gifts to UK-registered charities are 100% IHT-free.

• If you leave 10% or more of your estate to charity, the IHT rate on the rest drops from 40% to 36%.

  
  

Example:

Leave 10% of your £2m estate to charity (£200k). The remaining £1.8m is taxed at 36%, saving your beneficiaries thousands.

Life Insurance:

Take out a whole-of-life insurance policy in trust to cover your estimated IHT liability.

The pay-out doesn’t form part of your estate, and your beneficiaries receive funds quickly to pay HMRC. Any IHT liability is due 6 months from the end of the month in which death occurred. From that point onwards interest is applied to the liability at 4% above the Bank of England Base Rate.

Conclusion: Plan Early, Act Strategically

Inheritance Tax is not just about numbers — it’s about legacy, family, and control. With the upcoming reforms to reliefs and a continued freeze on allowances, now is the time to review your estate plan.

Whether you're passing on a business, farm, property, or simply building up your savings, the right strategy can make a six-figure difference.

Bespoke Inheritance Tax Planning:

At XV Wealth, we specialise in creating personalised inheritance tax plans and our planning process includes;

• Getting to know you, your family and your business – this helps us understand what you have planned in the coming years and what you are aiming to achieve personally and professionally.

• Assessing all your finances including income, expenditure and your financial assets including helping obtain accurate business valuations where required.

• Creating strategies to help set-up your finances to help ensure that they are giving you the best chance of hitting your goals. This may involve tax saving strategies, estate planning, investment management or a combination of everything.

• Providing ongoing support to help adapt the plan when personal circumstances or market conditions require it.

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If you are looking to make a start planning your retirement, then contact XV Wealth for a Estate Planning Consultation today.

Financial Adviser Cheshire and Pension Adviser Chester

XV Wealth are an Independent Financial Adviser based in Chester, Cheshire.

About us: XV Wealth is an independent financial advisor based in Chester. As an independent financial adviser, we can provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice. If you want to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 01244 62 88 71. XV Wealth Financial Advisers email is info@xvwealth.co.uk.

This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a guide to what might happen in the future.

The taxation of the investment is dependent on the individual circumstance of each investor, and may be subject to change in the future.

The Financial Conduct Authority does not regulate Cashflow Planning.

The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice.