Can I Avoid Paying Inheritance Tax? The Definitive Guide to Reducing or Eliminating IHT in the UK

When planning how to pass wealth to the next generation, the looming 40% Inheritance Tax (IHT) charge can feel like a major obstacle.

And so it’s no surprise that one of the most asked questions we get at Belgravia Capital Wealth Management is:

“Can I avoid paying inheritance tax?”

The honest answer is: not entirely, but you can reduce or even eliminate it with careful planning.

IHT is one of the most avoidable taxes in the UK, but it requires foresight, clarity, and the right combination of legal and financial strategies.

In this comprehensive guide, we explore the methods UK individuals and families can use to legally reduce or avoid IHT - and the common pitfalls to watch out for.

Understanding Inheritance Tax in the UK

Inheritance Tax is a tax on the value of your estate when you die. That includes:

• Property (your home or investment properties)

• Savings and investments

• Pensions not in drawdown

• Business interests

• Valuable possessions (e.g. jewellery, art)

As of 2025, every individual has:

• A £325,000 nil-rate band (NRB) - your standard tax-free allowance

• A £175,000 residence nil-rate band (RNRB) - if leaving your main residence to direct descendants

Together, a married couple or civil partners can pass on up to £1 million tax-free.

Everything above that is typically taxed at 40%.

Can You Avoid Inheritance Tax Completely?

In some cases, yes - especially for:

• Married couples or civil partners

• Those leaving everything to charity

• Individuals whose estates fall within the £1m combined threshold

But for high-net-worth individuals, property owners in London or the Southeast, and entrepreneurs, IHT is a real risk.

However, you can legally reduce or eliminate your exposure using the strategies outlined below.

1. Make Gifts During Your Lifetime

One of the simplest ways to reduce your estate’s value is to give some of it away before you die.

Key gift rules:

• Gifts are potentially exempt transfers (PETs) — if you survive 7 years, they fall outside your estate for IHT purposes.

• If you die within 7 years, taper relief may reduce the tax due (after year 3).

Annual gifting allowances:

• £3,000 per tax year (can be carried over one year)

• Small gifts of £250 to any number of people (can’t be combined with the £3,000)

• Wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else)

• Regular gifts from income — as long as they don’t affect your standard of living

Over time, these can reduce your taxable estate significantly.

2. Leave Assets to a Spouse or Civil Partner

Any assets you leave to a spouse or civil partner are free of IHT.

This not only avoids tax on the first death but also allows the surviving partner to inherit any unused nil-rate bands, potentially passing up to £1 million to children without tax.

3. Use Trusts to Move Assets Out of Your Estate

Trusts are powerful tools for IHT planning. They allow you to:

• Remove assets from your taxable estate

• Control how and when beneficiaries receive funds

• Protect family wealth from divorce, bankruptcy, or misuse

Common types include:

• Discretionary trusts: offer flexibility and asset protection

• Bare trusts: simpler, tax-effective for straightforward family gifts

• Interest in possession trusts: provide income to one person, with capital preserved for others

Be aware:

• Transfers into trust may trigger a 20% IHT charge if they exceed your nil-rate band

• Trusts are also subject to 10-year and exit charges

Still, they remain one of the most effective long-term tools for IHT planning.

4. Claim Business or Agricultural Relief

Certain assets qualify for relief from IHT at 50% or 100%:

• Business Relief (BR) applies to shares in unlisted trading companies, family businesses, or partnerships

• Agricultural Relief (AR) applies to qualifying farmland or buildings used in agriculture

These reliefs can eliminate IHT on family businesses or farms - as long as conditions are met. Holding such assets for at least two years is often required.

5. Take Out Life Insurance in Trust

You can’t avoid the tax - but you can insure against it.

A whole-of-life insurance policy, written in trust, can:

• Provide a tax-free lump sum to pay your IHT bill

• Ensure your beneficiaries don’t have to sell property or other assets

• Bypass probate for quick access to funds

The key is putting the policy in trust - otherwise, the payout will just add to your estate and increase the tax bill.

6. Donate to Charity

Anything you leave to a UK-registered charity is exempt from IHT.

And if you leave 10% or more of your net estate to charity, the IHT rate on the rest of your estate is reduced from 40% to 36%.

This can be a valuable strategy for philanthropically minded individuals — and it reduces tax for the whole estate.

7. Use Deeds of Variation

If you receive an inheritance you don’t need, you can execute a deed of variation within 2 years of the person’s death to redirect it:

• To other beneficiaries

• Into a trust

• To a charity

This keeps the gift out of your estate — and reduces future IHT liability.

8. Simplify Your Estate and Reduce Probate Delays

Sometimes, avoiding IHT is less about reducing the bill and more about simplifying payment.

For example:

• Holding assets jointly (e.g. “joint tenants”) can reduce probate complexity

• Gifting surplus pension savings or choosing drawdown pensions can keep funds out of your estate

• Reducing unnecessary wealth accumulation later in life may help keep your estate under thresholds

9. Use Family Investment Companies (FICs)

An advanced strategy for high-net-worth individuals, a Family Investment Company:

• Allows assets to grow outside your estate

• Retains control while passing future value to children or grandchildren

• Can reduce IHT through structured shareholding and control mechanisms

FICs are complex and best used with bespoke legal and tax advice.

10. Downsize or Reinvest Strategically

Some people reduce IHT exposure by:

• Downsizing the family home and gifting surplus funds

• Investing in IHT-efficient portfolios (e.g. AIM shares that qualify for Business Relief - although this is soon to change)

• Replacing high-IHT assets with ones that pass tax-free

The goal is to shift wealth out of the IHT net, while still maintaining control or access where needed.

Common Misconceptions About Avoiding IHT

• “Just give it away.” You need to survive 7 years, and gifts must be properly documented.

• “The family home is always safe.” It’s usually a major part of the taxable estate unless covered by the RNRB.

• “Trusts are a loophole.” HMRC actively monitors and taxes most trust structures — you need expert advice.

• “My accountant will handle it.” Many accountants don’t specialise in estate planning. It’s essential to work with IHT experts.

How Belgravia Capital Wealth Management Can Help you to Minimise your Family’s IHT Bill

At Belgravia Capital, we offer:

• Bespoke IHT planning reviews

• Lifetime gifting and trust strategies

• Business relief and agricultural relief optimisation

• Life insurance structuring and trust setup

• Collaboration with solicitors and tax advisers

• Annual reviews to adapt to changing legislation and personal circumstances

Whether your estate is worth £1 million or £10 million, we provide sensible, proactive planning to keep your wealth in the family - not with HMRC.

Conclusion: Can I Avoid Paying Inheritance Tax?

Yes - in whole or in part - if you start early and plan properly.

From gifts and trusts to insurance and business relief, the UK tax system offers a wide range of legitimate ways to minimise or eliminate inheritance tax. But waiting too long or making poorly informed decisions can cost your family hundreds of thousands in unnecessary tax.

Start today - your future heirs will thank you.

Contact Belgravia Capital Wealth Management at contact@belgraviacapital.co.uk for a personalised inheritance tax review and strategy.