Inheritance Tax Planning: 10 Strategies You Can Follow

Picture of Written by: Liez Comendador
Written by: Liez Comendador
Inheritance tax planning

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You might have frequently heard this question, “Where do you see yourself in the next five to ten years?” Everyone usually has a long list of goals to deliver, but what if you don’t have the chance to live for the next years? What are your strategies then, money-wise, as life is too uncertain?

Almost always, people will be concerned about their families. They will try to provide them with security by improving their wealth to pass on to them later on. However, this wealth will be subject to inheritance tax, which their direct descendants will have to pay. This is why inheritance tax planning is something you have to seriously consider.

The inheritance tax your recipients will owe depends on the amount of wealth you leave behind. In this article, we will share different strategies on how to reduce or legally avoid inheritance tax liability through inheritance tax planning, effectively maximizing the wealth you transfer to the next generation.

Strategy No. 1: Purchase Discount Gift Trusts

The first strategy that you can adopt is “DISCOUNTED GIFT TRUST.” It takes a bit of legal paperwork to set up trust around an offshore investment bond that can hold global assets. This term specifies a fixed annual payment back to the settlor.

Investment bonds have a 5% withdrawal allowance with zero per cent income tax to pay. This means you can easily withdraw 5% of your investment from an investment bond without charge. Take, for instance, you invested a particular amount into this offshore trust. A total of 5% of the initial settlement could be paid back to you per annum for almost 20 years.

Investment bonds

Let’s have another example. Let’s suppose a settlor pays £500,000 into CGT. CGT specifies a 5% payment per annum back to the settlor, which would then be £25,000. The discount follows the value of the future cash flow, which is £357,000 and falls immediately outside the settlor’s estate, making an instant inheritance tax-IHT saving of 40%, which is £142,800.

The gift term follows that £500,000 minus £357,000 is £143,000, which is below the nil rate band of £325,000. So now, inheritance tax is liable to your investment or cashback. If the settlor lives for another 7 years, the IHT liability falls to zero allowing the settlor to avoid inheritance tax.

Total Cash
Amount Subject to IHT
IHT Rate
Amount to be paid to HMRC

                                                                 £         500,000     ..…………………    Total Cash

                                                                          (375,000)    ..………………..    Gift

                                                                £          143,000     ..…………………    Amount Subject to IHT

                                                                   *              0.40     ..…………………     IHT Rate

                                                               [ £        57,200 ]     ……………………    Amount to be paid to HMRC 

But by simply converting this money into CGT and receiving cashback of 5 per cent, this tax can be avoided. Individuals with sizeable estates who want their inheritance tax dues substantially reduced can use Discounted Gift Trust.

Strategy No. 2: Avail Loan Trust

Through a loan trust, a client lends monies to trustees who would then invest in a life company bond. This loan is repayable on demand with no interest on death. The client can retrieve the original investment from the trustee in lump sum form, use a 5% tax-deferred allowance, or combine both.

The original loan that is not inheritance tax-efficient remains in the state as no was gift made but the growth on the investment outside the estate from day one. This freezes the client’s liability on investments to the loan, often referred to as asset freezing.

Let’s suppose that a person is 50 years old and would live up to 80 years old or more. The 5% tax-deferred allowance per annum would simply mean an 80% return of money without any tax. This would make some specific assets free from inheritance tax.

deferred tax allowance

Any loan amount can be made into a discretionary loan trust without a charge per lifetime transfer on day one, although periodic and exit charges may apply. A tax payable at a maximum of 6% on this value will be paid, which is a very low charge for inheritance tax. This is why clients in their 40s and 50s find loan trust as one of the best options!

Strategy No. 3: Register for Life Insurance  

Considering life insurance as a loophole to reduce inheritance tax will be a smart move, especially whole life insurance policies, as they can significantly help beneficiaries deal with the burden of inheritance tax.

Normally, inheritance tax has to be paid before the assets are released to beneficiaries. This has resulted in many Britons making loans to cover the bills. Availing whole life insurance prevents this bill so that beneficiaries don’t have to turn to borrowing options.

Strategy No. 4: Take Advantage of Life Insurance Policy

You can also put your life insurance policy into a trust, which means your policy will be paid out immediately. Some life insurance policies may be subject to inheritance tax. To make sure that your loved ones receive the money promptly and without much hassle, place your life insurance policy into a trust.

Taking whole life insurance and term insurance policies work the same as that of a loan trust, allowing you a 5% withdrawal allowance. Both these policies have many benefits alongside. Make sure to seek the help of a financial advisor in making investments like this.

To make sure that your loved ones receive the money you want them to have, place your life insurance policy into a trust to ensure the right people receive the right money at the right time. “

Strategy No. 5: Pay for Pensions

Pensions are usually the most used strategy to save from inheritance tax, as taxable income can be charged up to 40%. However, when you put the money in a pension, you will pay minimum tax. Look at it this way, for instance, you either put £5000 in your pocket or £10,000 in a pension scheme.

The advantage is that at retirement, you only have to pay 20% tax instead of 40%. You also get a 25% tax-free lump sum of what you put into your pension. Although the downside is you will need to wait until age 55 before you can withdraw from your pension.

Say, for instance, the person dies before age 75, that would result in a maximum reduction in inheritance tax because that money will not be taxed at all. His heirs will be eligible for 45% tax relief, which means the money will be handed to them free from tax.

Pensions will not be deemed as part of your estate when calculating the inheritance tax. You can choose to withdraw them from age 55 onwards or pass it on as inheritance, tax-free, which is the main goal of inheritance tax planning in the first place.

Strategy No. 6: Give Gifts While Still Alive

A more straightforward approach is to give gifts (e.g., cash, property, etc.) while you are still alive, provided that you live another seven years, which would totally exempt the recipient from inheritance tax.

Giving gifts this way and living up to seven years is a good rule of thumb, although some gifts are automatically exempt, such as even when they are made only two years before death. As early as now, you can give away smaller sums, like packed wedding gifts and more.

giving gifts

Strategy No. 7: Alternative Investments Markets (AIM)

With IHT receipts topping 5 billion pounds last year, it’s no surprise that managed Alternative Investment Markets portfolios have been rising in popularity with wealthy investors. Many AIM stocks are also eligible to be free of inheritance tax after two years.

Investing in alternatives includes infrastructures such as water pipelines, roads, etc. Converting some of your assets into AIM projects that are in the nil rate band is a smart move, which would substantially free your wealth from inheritance tax.

Alternative Investments Markets:

There are a large number of AIM projects, such as on the image above, in which you can invest, and some offer hefty profits. These small independent alternatives do not interfere with your tax budget later on, massively improving your wealth as a result.

Strategy No. 8: Donate to a Charity

Another method is to convert your money into a charity donation. Most financial advisors would suggest that you give to charity an amount that doesn’t exceed the nil rate band, which is less than £325,000.

For example, you are a married couple filing your return jointly, and you make a taxable income of £100,000 every year. This would mean your highest marginal tax rate is 25%. Then you give throughout the year or a one-time lump sum of £5,000 to your local church or any other charitable organization. The £5,000 donation will consider your taxable income reduced, resulting in £1,250 tax benefit.

Proper Inheritance tax planning is required to decide about the proper amount to be donated in a charity to avoid tax to pay. “

Giving to charity lowers your taxable income, which would then lower your taxes. As your marginal tax bracket moves into the next lowest level, you will be taxed at lower rates from fifteen per cent, ten per cent, to zero per cent instead of twenty-five per cent, depending on how much you give.

Donating money to charity is one way to act on a cause or group of people you care about, whilst tax benefits go alongside as you get to save from inheritance tax bills in the future.

Strategy No. 9: Utilize Exemptions and Reliefs

Capital gains tax reliefs and exemptions can also make a huge difference in inheritance tax planning. They may be in the form of annual exemptions, small gifts exemptions, or normal expenditure from income exemptions.

Through these, you can give gifts of unlimited amounts to certain people and organizations without having to pay any IHT. Some gifts are not included in the estate even if the individual dies within seven years of making the gift.

Annual exemptions per se allow you to gift £3,000 each tax year, tax-free. On the other hand, small gifts exemption allows you to gift up to £250 to more than one individual in each tax year without having to pay tax. Exemptions like these can greatly reduce your inheritance tax.

Strategy No. 10: Utilize Business Reliefs

Using business reliefs allows you to make your assets outside of your estate if you hold them for a couple of years, freeing you from the burden of inheritance tax. Originally, business reliefs are for those who own companies. If they died and inheritance tax is charged on the value of their business, it can lead to complex issues.

If the business’ revenue is smaller than the tax it has to pay, it will be forced to close and lay off employees. In this case, no inheritance tax should be imposed. As long as they hold the company for at least two years, investing in one project instead of many, business reliefs can reduce the taxable income the company has to report, significantly reducing inheritance tax.

Life is unpredictable, like it or not. Better start inheritance planning now so you can maximize the wealth you can hand over to your loved ones and have the peace of mind that they are financially secure even when you are out of the picture. Upon inheritance planning, you can combine any of the strategies above. Financial advisors can help you decide which method best works for your situation. Reach us today!


Ginn, Jay. Gender, pensions and the life course: how pensions need to adapt to changing family forms. Policy Press, 2003.

Wrede, Matthias. “Fair inheritance taxation in the presence of tax planning.” Journal of Behavioral and Experimental Economics 51 (2014): 12-18

Dacey, Norman F. How to Avoid Probate. National Estate Planning Council, 1965.


  • Junaid Usman

    Apart from being a partner at Legend Financial, Junaid is an expert on Business Tax including business management advisory services which has proven in the growth of company. He is a promising advisor with an ideology; "Any business success depends on the level of objectivity it maintains."

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Picture of Junaid Usman
Junaid Usman
Apart from being a partner at Legend Financial, Junaid is an expert on Business Tax including business management advisory services which has proven in the growth of company. He is a promising advisor with an ideology; "Any business success depends on the level of objectivity it maintains."

2 thoughts on “Inheritance Tax Planning: 10 Strategies You Can Follow”

  1. There are many strategies mentioned in this article that can easily cover a broad spectrum of people with different needs. This could be very helpful and enlightening for many. I would suggest to read the other article as well in this series to better understand the options available.

    1. Hi Ali,

      Thank you for your comments, it’s really encouraging 🙂
      We do detailed research and always try to bring something unique and upto date to read.

      Feel free to contact should you wish you discuss more in detail.


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