How to pay less inheritance tax in 2025

Tax receipts are rising, particularly for under-the-radar taxes such as inheritance tax (IHT). There are effective and straightforward ways to mitigate IHT, but a lack of communication within families can be a major hindrance. We look at the steps people need to take, and why it’s good to talk.

Every year, the Adam Smith Institute calculates ‘Tax Freedom Day’. This is the day in the year that Britons stop paying tax and get to keep what they earn. It has been getting later and later, as the tax burden on households increases. This year it falls on 10th June: two weeks later than in 2019. Part of this increase can be attributed to inheritance tax, with HMRC receipts increasing year on year.

IHT receipts are already at record high levels as rising house prices and frozen tax allowances draw more people into the net. Changes to pension allowances and Business Property Relief (BPR) are likely to bump receipts even higher from next April. The OBR forecasts that IHT receipts will hit £14bn by the end of the decade, from their current level of just over £8bn. With this in mind, it is worth looking at ways to mitigate your IHT bill where possible.

However, inheritance tax planning requires communication. Our research* suggests that families still find this difficult. 43% of consumers admit they haven't spoken about inheritance tax with anyone and only 22% have spoken to their children about it. Our research found that 36% of children do not know what their parents’ plan is when it comes to inheritance. With a significant transfer of wealth between baby boomers and millennial imminent, there is an alarming lack of clarity or knowledge on how money will move from one generation to the next – with the result that estates pay too much IHT.

Read more: Inheritance tax – Britain’s “most-hated” tax is often misunderstood

Where should you start?

First, it’s important to note that all of your wealth is included for IHT, including the family home, and only money left to a spouse or civil partner passes free from inheritance tax. That means money left to children, live-in partners, parents or anyone else is subject to it.

There are mitigating factors. Everyone has a ‘nil rate band’ of £325,000, which is not chargeable to IHT. Where your children or grandchildren (including adopted, fostered and stepchildren) stand to inherit the family home, then there is more protection in the form of the ‘main residence nil-rate band’ – this is £175,000 each or £350,000 for a married couple. Where money has passed to a spouse tax-free, both nil rate bands are taken into account when it is passed on to the next generation. This can exempt up to £1m, after which the rate is 40%.

It's good to gift

However, this could still leave large sums subject to inheritance tax, particularly if someone has a large family home that has benefited from rising property prices. Regular gifting is the first and easiest way to pass money on to the next generation free from inheritance tax. There are signs that families have got the message on this. Our research showed that respondents gifted £5,677 on average to family and friends in the past year.

There are three main gifting options: the first is to use the regular annual gifting allowance of £3,000. This is your annual exemption and can be given away to whoever you like. The second is a less widely used option. You can make regular gifts out of income, providing you can show that it doesn’t impact your standard of living. There is no limit to these, but are usually cash gifts (because they need to be out of income for the exemption to apply).

The final option is to make ‘potentially exempt transfers’. These are gifts of cash or assets and can be as much as you want. If you survive for seven years after the gift, it will fall out of your estate for inheritance tax purposes. If you survive for less than seven years, the tax bill can be tapered.

It is important to note the rules around ‘gifts with reservation of benefit’. It is not enough to give away legal ownership. If you give away your home and continue to live in it, HMRC will want to see that you are paying the new owner a market rent, even if it’s your child. Equally, potentially exempt transfers are transfers for capital gains tax purposes, so be wary of gifting assets that may have a large capital gain attached.

The family home

For many people, the main family home will be the lion’s share of their estate. There is no ‘main residence’ exemption for IHT as there is for capital gains tax and the family home cannot easily be gifted away. It may be possible to downsize and pass on some of the proceeds via gifts. Alternatively, if you want to continue to live in the house, you could consider a retirement interest only mortgage to release capital from your home, pass capital to your heirs and reduce the size of your estate. However, this would need to be carefully considered as the rate of interest on such products can be high and the debt can compound quickly.

Despite forthcoming changes, business property relief (BPR) is still an option to reduce inheritance tax. As things stand, investments in private companies, including AIM shares, can be passed on free from inheritance tax under business property relief. This will increase in April 2026. From that point, the first £1 million of qualifying assets will be exempt from IHT and the excess will attract 50% relief (producing an effective 20% tax rate). Many wealth managers offer managed funds specifically designed to mitigate inheritance tax through a carefully selected portfolio of AIM stocks, though these do not benefit from the first £1m exemption.

There are more complex tax planning options, which can be worth exploring for larger estates including the selective use of trusts. These are not as tax advantageous as they used to be but have a role in specific circumstances. In other circumstances , life insurance can be used to reduce the IHT bill on your beneficiaries. This can also mean beneficiaries can meet inheritance taxes easily and without selling assets. Charitable gifts are another option: if you leave at least 10% of your assets in your will to charity, you can reduce the rate of inheritance tax on everything else to 36%. These latter options require financial advice.

Mitigating inheritance tax requires forward planning. That means discussing the options as a family, making gifts where possible, and having a strategy for passing on the remainder of your assets. While it can be a difficult subject, it is an area where good communication can really pay off.

How much inheritance tax could be liable on your estate?

Use our calculator to estimate your estate’s Inheritance Tax (IHT) liability.

Inheritance tax calculator

Research conducted by Censuswide, among a sample of 1,000 ‘DIY’ Investors in the UK, aged 18+ between 30.04.25 - 08.05.25.