There are a number of ways of helping your heirs avoid having to pay inheritance tax altogether.

3. Leave your estate to your spouse

Your spouse or civil partner will never have to pay tax on assets you leave them, regardless of the amount. Making the most of this in your will can save your family a small fortune.

When your spouse passes away, they’ll inherit your unused personal allowance, allowing them to pass on up to £325,000 more as part of the main IHT allowance.

If they (or you) have remarried, then unused personal allowances can be added together and passed on – but only up to the value of one whole personal allowance (ie the most it can increase by is £325,000).

4. Use property allowances

If you’re leaving your estate to children or grandchildren, property allowances let you leave more of your home before tax is due.

In the current 2022-23 tax year, it’s worth £175,000 per person. For a married couple, this increases the tax-free amount by £350,000, so including the personal allowance, estates of up to £1,000,000 could be completely free of IHT this year.

You can find out more in our guide to inheritance tax and property.

5. Consider equity release

If all your wealth is tied up in your property, you may not be able to make use of gifts during your lifetime or spend your wealth on yourself. To get around this, some people take out an equity release scheme.

It’s important to remember that all this really does is reduce the assets you own, and increase the debts that will count against your estate. If you don’t need to access cash from your property, giving assets away earlier is likely to be better for you.

How equity release schemes work

With these schemes, you can either borrow money against the value of your home (known as a lifetime mortgage), or sell part of your home at a reduced market rate, but remain living there throughout your life (a home reversion scheme).

The money you release can be passed on to your heirs, or spent yourself. Providing you survive the gift by seven years, there will be no tax to pay.

When you die

When you die, the value of your estate will be reduced, either by the mortgage debt (with a lifetime mortgage) or because only part of the value of your home will still belong to your estate (with a home reversion).

Think carefully

It sounds simple enough, but think carefully before going down this route. With lifetime mortgages, interest is ‘rolled up’ and your debt can swiftly grow.

For example, a £50,000 mortgage with an interest rate of 7% a year will have almost doubled to £98,358 within 10 years. You could end up owing more to your lender than your estate would have paid in tax – either way, your heirs won’t benefit.

With the other route, you’re selling off part of your home for less than its full value. So think about whether you’re willing to let the bank take half of your home, just to stop HMRC getting a slice.

Consult a specialist

If you do think equity release might be for you, we recommend you always consult an independent financial adviser who specialises in equity release before going ahead.

6. Take out a life insurance policy

If you can’t beat an IHT bill, you can insure against it. This is one of the simplest ways of covering an unwelcome bill, but unless you’re relatively young and healthy, the cost may be high.

Providing the policy is written into trust, the payout won’t form part of your estate. You can find out more in our guide to trusts and inheritance tax.

HMRC treats the premiums paid to the insurance policy as a lifetime gift if you pay them yourself, but these can usually be covered by one of the tax-free exemptions – either the annual £3,000 exemption or the ‘gifts out of normal income’ exemption.

7. Consider a ‘deed of variation’?

A deed of variation allows your heirs to alter your will after death so that, for example, part of the inheritance is re-directed to someone else.

They can draw up a deed of variation within two years of your death, but all affected beneficiaries under the will must agree to the variation.

This can be difficult in practice, especially if there are many beneficiaries.

As a general rule, it’s better to review your will periodically so that your affairs are tax-efficient.

This will simplify the probate process for your executor, and reduce the chances of your loved ones squabbling, which sadly, can happen a lot.