5 ways to reduce your Inheritance Tax bill

Inheritance Tax (IHT) is charged at 40% on the part of your estate above your available tax-free allowances. With property prices having risen substantially over the past few decades, more families than ever are finding themselves with an IHT liability — even though most people don't consider themselves "wealthy". Fortunately, there are several legitimate and well-established ways to reduce the bill your loved ones might face.

1. Use your annual gift allowance. You can give away up to £3,000 per tax year completely free of IHT, and this can be carried forward one year if unused. Smaller gifts of up to £250 per person are also exempt, as are wedding gifts up to certain limits.

2. Make use of the 7-year rule. Larger gifts become entirely free of IHT if you survive 7 years after making them. Between 3 and 7 years, "taper relief" gradually reduces the tax charged. This makes gifting earlier in retirement — while you're in good health — particularly effective.

3. Leave your home to direct descendants. The Residence Nil-Rate Band gives you an extra £175,000 tax-free allowance (on top of the standard £325,000) specifically when your main home passes to children or grandchildren — potentially raising your tax-free threshold to £500,000, or £1 million for a married couple.

4. Leave money to charity. Gifts to registered charities are entirely exempt from IHT. If you leave 10% or more of your net estate to charity, the rate on the remainder also drops from 40% to 36%.

5. Consider a trust. Placing assets into certain types of trust can remove them from your estate for IHT purposes, although the rules are complex and trusts have their own tax treatment. This route should only be taken with professional advice, as getting it wrong can be costly.