By | June 4, 2025
0 Comment

How To Avoid Paying Inheritance Tax

Avoiding or minimizing inheritance tax (also called estate tax or death duty in some regions) legally involves strategic planning. Here’s a breakdown of common and legal methods to reduce or avoid inheritance tax, especially in places like the UK and the US, where the rules differ significantly.

🇬🇧 In the United Kingdom

1. Use the Nil-Rate Band

  • Everyone has a £325,000 tax-free allowance.
  • Anything above that is taxed at 40%.
  • If you leave your estate to a spouse or civil partner, there’s no tax.

2. Residence Nil-Rate Band (RNRB)

  • An additional £175,000 allowance if you pass your home to a direct descendant.
  • Can be transferred to a spouse, doubling to £1 million for a couple.

3. Gifting

  • Gifts made more than 7 years before death are tax-free.
  • Gifts within 7 years may be taxed on a sliding scale (“taper relief”).
  • Annual exemption: you can give away £3,000 per year tax-free.
  • Small gifts (up to £250) are exempt if given to different individuals.

4. Use of Trusts

  • Putting assets into a trust removes them from your estate, though rules are complex and may still attract charges.
  • Discretionary trusts or bare trusts are commonly used.

5. Charitable Donations

  • Leave 10% of your estate to charity to reduce inheritance tax rate from 40% to 36%.

6. Life Insurance Policies

  • A policy written in trust pays out outside your estate and can cover inheritance tax costs.

🇺🇸 In the United States

1. Use the Estate Tax Exemption

  • For 2024, the federal exemption is $13.61 million per person ($27.22 million for couples).
  • Amounts above this are taxed at up to 40%.
  • Use of lifetime gift exemptions also helps reduce estate value.

2. Annual Gift Tax Exclusion

  • You can give up to $18,000 per person per year tax-free (2024).
  • No limit on number of recipients.

3. Irrevocable Trusts

  • Assets in an Irrevocable Life Insurance Trust (ILIT) or Grantor Retained Annuity Trust (GRAT) are removed from your estate.
  • Popular for large estates to avoid future tax burdens.

4. Charitable Giving

  • Charitable Remainder Trusts (CRTs) or foundations can reduce the taxable estate while giving you income during life.

5. Spousal Transfers

  • Unlimited tax-free transfers to a U.S. citizen spouse.
  • Use of Portability Election ensures unused exemption transfers to spouse.

General Advice

✅ Start Early – Many strategies (like gifting or trusts) require years to be effective.
✅ Keep Good Records – HMRC and IRS scrutinize gifts and transfers.
✅ Get Professional Help – Tax laws are complex and change often; consult an estate planner or tax attorney.