How to Reduce Your Inheritance Tax Bill in 2025

Inheritance tax (IHT) is a key consideration for many individuals who wish to preserve their wealth for future generations. As of 2025, a number of significant reforms have been introduced that will impact the way estates are taxed. Understanding these changes and knowing how to reduce your inheritance tax bill is crucial for ensuring any inherited assets are passed on to your beneficiaries in the most tax-efficient manner possible.

Understanding the 2025 Inheritance Tax Reforms

During the 2024 autumn budget, Chancellor Rachel Reeves announced several pivotal changes to the IHT regime, which will come into effect from 6th April 2025. One of the most notable reforms is the shift from a domicile-based system to a residence-based system. This means that individuals who have been UK tax residents for at least ten out of the previous twenty tax years (now classed as “long-term residents”) will be subject to inheritance tax on their worldwide assets, regardless of their domicile status.

Additionally, the inheritance tax threshold, also known as the nil-rate band, will be frozen at £325,000 until 2030. The residence nil-rate band, which applies when a home is passed on to direct descendants, will remain at £175,000. This allows for a potential total exemption of up to £500,000 per individual, or up to £1 million for a married couple or civil partners.

You can read more about the new 2025 inheritance tax reforms via the official House of Lords Library resources.

Strategies to Reduce Your Inheritance Tax Bill in 2025

Utilise Tax Exemptions and Reliefs

There are a number of inheritance tax exemptions and relief schemes available, such as:

• Spousal exemptions – Any assets left to surviving spouses or civil partners are exempt from IHT. This allows the surviving partner to inherit the entire estate tax-free, and any unused nil-rate band can be transferred, which effectively doubles the allowance for the couple.
• Annual gift tax exclusion – You can gift up to £3,000 each tax year which is not added to the value of your real estate. This is also known as the annual exemption. If unused, it can be carried forward for one year, allowing a potential gift of £6,000.
• Small gifts exemption – Gifts of up to £250 to any family members or individuals of your choosing are exempt from IHT each year, as long as the recipient hasn’t benefitted from your annual exemption.
• Charitable donations – Leaving part of your estate to charity can reduce your IHT rate. If you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate reduces from 40% to 36%.

Review Business and Agricultural Reliefs

Business Property Relief (BPR) and Agricultural Property Relief (APR) can offer up to 100% relief from IHT on any qualifying assets, including the business itself and any shares or assets held personally in the business. However, it’s important to note that the rules governing these reliefs have recently been tightened – we recommend reviewing your holdings to ensure they still qualify, and consider restructuring if necessary. 

Make Use of the Seven-Year Rule

Gifts made more than seven years before your death are generally exempt from inheritance tax. This is known as a Potentially Exempt Transfer (PET). However, if you pass away within seven years of giving a gift and there is IHT to pay on it, you may be taxed on a sliding scale known as ‘taper relief’. Making lifetime gifts, wherein you regularly gift assets during your lifetime, can help to significantly reduce the value of your taxable estate. 

Establish Trusts

Setting up a trust can be an effective way to transfer your assets and reduce IHT liability. Assets that are placed in certain types of trusts may not form part of your estate for IHT purposes, as long as specific conditions are met. For instance, a Discounted Gift Trust (DGT) allows you to gift a lump sum into a trust while retaining the right to regular withdrawals, which helps to immediately reduce the taxable value of your estate.

Consider Life Assurance Policies

Taking out a life assurance policy written in trust can provide funds to cover the IHT liability upon your death. This ensures that your beneficiaries are not forced to sell any assets to pay the tax. The policy proceeds are instead paid directly to the trust outside of your estate, avoiding the accumulation of IHT.

Regularly Review and Update Your Will

An up-to-date will is vital for ensuring that your estate is distributed according to your wishes, and in the most tax-efficient manner possible. Make sure that your will is regularly updated in line with any legislation changes, and contains accurate information on your personal circumstances and asset values.

Expert Inheritance Tax Planning from Piercefield Oliver

Inheritance tax planning is a complex process. At Piercefield Oliver, we provide a comprehensive range of estate planning services that help you structure your assets efficiently and reduce your IHT liability. Our advisors offer expert guidance on setting up family trusts, maximising reliefs, and creating strategic financial plans to ensure your wealth is passed on according to your wishes. 

Get in touch with us today to discuss how we can help protect your estate for future generations.