How to Avoid Inheritance Tax on Property

PHS Team

18 Aug, 2025

Inheritance Tax (IHT), sometimes called death duties or labour inheritance tax, is a tax on the money or property you leave behind when you die. In 2025, new legal rules and changes were made to the inheritance tax. 

If you want to keep more of your money or property for your family, it’s good to understand how inheritance tax works and the best ways to avoid or reduce it legally.

Where Can You Find Inheritance Tax?

Inheritance tax is charged by the UK government. It applies when your estate (all your money, property, and possessions) is worth more than a certain amount. This amount is known as the nil rate band. In 2025:

• The nil rate band is set at £325,000.
• There is also an extra residence nil rate band of £175,000 if you leave your main home to your children or grandchildren.
• These thresholds are frozen until 2030, meaning they don’t increase with inflation.

If your estate is worth more than £500,000 (the combined allowance), inheritance tax may apply at 40% on the amount above this threshold.

Inheritance Tax Changes in 2025

Big changes started from 6th April 2025:

• If you have been a resident for 10 out of the last 20 years (called a long-term resident), your worldwide assets may be taxed.
• If you leave the UK, you could still pay inheritance tax for up to 10 years on your assets, depending on how long you lived here.

How to Avoid Inheritance Tax? 

Inheritance tax planning is easier when you know the key ways to reduce or avoid it legally. Here are some tips:

• Use Your Nil Rate Band and Residence Nil Rate Band

• Most ISAs are not subject to inheritance tax, making them good for saving.
• From 2027, pensions will start counting towards inheritance tax, so it’s good to plan.

• Consider Pensions and ISAs

• Using trusts and gifts from the first to die can reduce tax when the second parent dies.
• Wills to trust can help in this situation.
   

• Planning for the Second Parent’s Death

• Writing a will with inheritance tax in mind can save your family money.
• You can include trusts or charitable gifts in your will.
• Leaving at least 10% of your estate to charity lowers the tax rate on the rest.
   

• Use Your Will to Plan

• Trusts help you control who gets your assets and when.
• You can put your house or money into a trust to avoid inheritance tax.
• Setting up a trust requires paperwork and you need to register it with HMRC.
• Trustees manage the trust for your beneficiaries.
   

• Set Up a Trust

• You can give away up to £3,000 per year without tax.
• Gifts made more than 7 years before death usually won’t be taxed.
• Putting your house in a trust (property trust or will trust) can protect it from inheritance tax.
• But beware of the “7-year rule” for gifts and other gifting rules.
   

• Gifting Money and Property

• Each person can pass on £325,000 tax-free.
• Leaving your home to direct descendants adds £175,000 more tax-free.
   

Inheritance Tax Loopholes and Avoidance

Be careful of inheritance tax loopholes and schemes that sound too good to be true. The government regularly closes many loopholes, so legal planning is safer than risky avoidance tactics.

• There are no secret ways to fully avoid inheritance tax.
• Transfers between spouses or civil partners are tax-free.
• Trusts can help reduce tax if you live 7 years after setting them up.
• Giving gifts more than 7 years before death lowers tax.
• Use your tax-free allowances like the nil rate band.
• Taper relief cuts tax on gifts made 3 to 7 years before death.
• Life insurance can help pay inheritance tax bills.
• Avoid risky schemes; they can cause problems or fines.
• Legal planning with allowances, gifts, and trusts is best.

The 7-Year Rule for Gifts

The 7-year rule is an important part of inheritance tax planning in the UK. It helps decide whether gifts you give during your lifetime will count towards inheritance tax after you die, saving money for your loved ones when used wisely.

• If you give a gift and live 7 years or more after, it will not be taxed for inheritance tax.
• If you die within 7 years of giving a gift, the gift may be taxed.
• The tax reduces gradually the longer you survive after the gift, thanks to taper relief.
• Gifts given less than 3 years before death are taxed at the full 40% rate.
• Between 3 and 7 years, tax rates reduce step-by-step:
  • 3 to 4 years: 32%
  • 4 to 5 years: 24%
  • 5 to 6 years: 16%
  • 6 to 7 years: 8%
  • After 7 years: 0% (no tax)
• You have an annual gift allowance of £3,000 which is always tax-free.
• Gifts over the £3,000 allowance made within 7 years of death may be taxed.
• Some gifts, like those between spouses/civil partners, are exempt from inheritance tax.
• Gifts where you keep some benefit (e.g., living in a house you gave away) may still count towards your estate.
• Using the 7-year rule effectively helps you reduce inheritance tax and protect what you pass to loved ones.

Conclusion

Inheritance tax can feel complicated, but with good planning, you can reduce it legally and protect your family’s future. Use your allowances, make gifts wisely, set up trusts, and write clear wills. 

Remember the 7-year rule and avoid risky loopholes. Planning early helps keep more of your money and property for those you love.

How Can PHS Associates Help You?

Managing your inheritance tax planning can be complex. PHS Associates offers expert support to help you minimise your inheritance tax liability and protect your estate.

We provide clear guidance throughout the tax planning process, ensuring your documents and records are accurate and compliant with the latest UK inheritance tax regulations.

If you need reliable and professional assistance with your inheritance tax planning or have any questions, contact PHS Associates at 0208 8611685 or email info@phs-uk.co.uk. We are here to make the process simple and stress-free for you.

Frequently Asked Questions