How Do the Rich Avoid Inheritance Tax?

Inheritance tax (IHT) can significantly reduce the value of an estate passed on to heirs. In the UK, it’s charged at 40% on estates worth more than the current threshold, yet many high-net-worth individuals legally reduce their exposure. So, how do the rich avoid inheritance tax—and could the same principles apply to you?

This guide explores the strategies wealthy families use to protect assets, including the use of living trusts, lifetime gifts, exemptions, and tax-efficient planning.

What Is Inheritance Tax and Who Pays It?

Inheritance tax in the UK is charged at 40% on the portion of an estate that exceeds the £325,000 nil-rate band. An extra £175,000 allowance may apply if the estate includes a main residence passed to children or grandchildren.

Married couples can transfer their unused allowances, potentially shielding up to £1 million from tax. Anything above this is taxed unless further planning is in place.

What Is a Living Trust?

A living trust—also known as a lifetime trust or inter vivos trust—is a legal arrangement where assets are transferred into a trust while the person is still alive. The trust is managed by appointed trustees and distributed according to the terms set by the person creating it (the settlor).

There are several types of trusts in the UK:

• Discretionary trusts, where trustees control how and when funds are distributed

• Interest in possession trusts, where one beneficiary receives income while capital passes to others later

• Bare trusts, where the beneficiary has an immediate right to both income and capital

Trusts can be used to manage inheritance tax liabilities, pass on wealth across generations and retain control over how assets are used.

What Happens If I Don’t Have a Living Trust in Place?

Without a trust, assets are usually distributed through your will or intestacy rules, and the value of the entire estate is considered for inheritance tax purposes. This can result in a larger tax bill, less control over when and how your beneficiaries inherit, and delays in probate.

For wealthier individuals, this lack of planning can result in tens or even hundreds of thousands of pounds going to HMRC rather than to family or charitable causes.

When Should I Set Up a Living Trust?

Trusts should ideally be set up well in advance—often several years before the assets are likely to be distributed. This is because gifts into trusts can still attract inheritance tax if you die within seven years of transferring the asset, although taper relief may reduce the bill over time.

Most high-net-worth individuals begin estate planning in their 50s or 60s, but it’s never too early to consider it, especially if you hold property, business assets or investments.

How Do I Set Up a Living Trust?

Setting up a trust involves:

1. Choosing the type of trust that suits your goals

2. Appointing trustees (usually family members or professionals)

3. Naming beneficiaries

4. Transferring assets into the trust

5. Registering the trust with HMRC via the Trust Registration Service (if required)

It’s strongly recommended to seek advice from a solicitor or tax specialist to make sure the trust is set up correctly and aligns with inheritance tax and income tax rules.

Other Inheritance Tax Strategies Used by the Rich

While trusts are a powerful tool, they’re just one part of a wider estate planning approach. Here are some of the other methods used by wealthy individuals to reduce inheritance tax legally:

Gifting During Lifetime
Making gifts to children or others during your lifetime can reduce the size of your estate. If you survive for seven years after the gift, it’s generally free from inheritance tax. Regular gifts from surplus income can also be exempt.

Using the Annual Exemption                         
Everyone can gift up to £3,000 per year free from inheritance tax. This can be carried forward for one year if unused. Smaller gifts for weddings or birthdays may also be exempt.

Leaving Money to Charity
Leaving 10% or more of your estate to charity can reduce your inheritance tax rate from 40% to 36%. This can be structured into your will as part of a tax mitigation strategy.

Business and Agricultural Relief
Qualifying business assets and agricultural land can attract relief of up to 100% from inheritance tax. Wealthy individuals often hold shares in businesses or agricultural property for this reason.

Life Insurance in Trust
Some take out a life insurance policy and place it in trust to cover the inheritance tax bill. This doesn’t reduce the liability but ensures beneficiaries receive the full estate without needing to sell assets quickly to pay HMRC.

Spousal Transfers
Assets left to a spouse or civil partner are exempt from inheritance tax, regardless of amount. This allows estates to be passed on tax-free, and the unused allowance can be passed on too.

Final Thoughts

There’s no single trick that allows the rich to completely escape inheritance tax, but a combination of trusts, gifts, exemptions and forward planning can significantly reduce the bill. These strategies are legal, and in many cases, available to anyone with the foresight to act early.

If you’re concerned about inheritance tax, speak to a solicitor or estate planner. Even if your estate isn’t large, a few smart decisions could ensure your loved ones inherit more—and the taxman less.