How to Avoid Inheritance Tax: The Complete Guide

How do you avoid inheritance tax? The answer is that there are many ways to avoid or reduce inheritance tax. However,  inheritance tax is structured differently across countries.

Therefore, learning about this tax system and how to make it best benefit you and your family is crucial. The rising living costs, record inflation, and growing wealth disparity make saving money and leaving an adequate inheritance for your heirs more challenging than ever. Fortunately, there are ways you can legally reduce tax liability or even avoid paying inheritance tax altogether.

This guide provides nine ways to avoid inheritance taxes and everything you need to know about how inheritance tax works.

What is an inheritance tax?

An inheritance tax is a tax that is imposed on the transfer of property and other assets from one person to another after they’ve died.

For tangible assets like property, the tax is levied on the value of the assets transferred, whereas cash inheritance is simply a percentage of the amount. The person who inherits the property or other assets pays the tax.

Different countries have different rules regarding inheritance taxes. In Great Britain, there are no jurisdictional tax authorities; all tax policies are determined by HMRC (His Majesty’s Revenue & Customs). In contrast, territories of the United Kingdom, such as Gibraltar and the Cayman Islands, make their own tax rules.

The United States functions similarly. There are no federal estate taxes on inheritance, and decisions are not made at the federal level. Inheritance, gift, and capital gains taxes are determined at the state level. Many states in the US treat inheritance tax very differently. Some states have no inheritance tax, whereas others have tax rates as high as 20 percent.

11 Ways to Reduce Inheritance Tax

Inheritance tax can be a significant estate tax burden for many people. However, there are many ways to reduce the federal inheritance tax you must pay.

1. Valuation date

An alternate valuation date is typically used to value assets for tax purposes. The most common alternate valuation date is the date of the decedent’s death, but other dates may be used in certain circumstances. For example, if the decedent owned real estate valued at less than its fair market value on the date of death, an alternate valuation date generally reduces inheritance tax.

There is also usually a grace period for paying the tax, which is about six months from the date of death. Therefore, if the inherited assets are received in a declining market, it may reduce the inheritance taxes due.

The use of an alternate valuation date is controversial. Some argue that it unfairly benefits those who can take advantage of it, while others contend that it is a necessary tool to ensure that taxes are paid on the true value of an asset. Ultimately, whether or not to use an alternative valuation date is a decision that must be made on a case-by-case basis.

2. Life insurance

A life insurance policy with heirs as the beneficiaries is a preventive measure to reduce inheritance tax before death. Life insurance proceeds are not seen as taxable income, so when you die, your beneficiaries receive the policy’s proceeds without being liable for tax.

Another advantage of using life insurance proceeds to transfer assets is that it can be done quickly and easily. You don’t have to go through the probate process, which can be lengthy and expensive, and unlike cash and tangible assets like property, there are no limits on how much you can give away through an insurance policy.

If you’re considering using life insurance proceeds to transfer assets and reduce tax liability, be sure to talk with an experienced estate planning attorney or tax professional to ensure it’s the right decision for your situation.

3. Trust fund

Several variations of trusts can be created, including bare, discretionary, accumulation, and non-resident trusts. The two most common types—and most relevant regarding estate and inheritance taxes—are revocable trusts and irrevocable trusts.

As the names suggest, the two operate very differently; here is a brief explanation:

• A revocable trust can be altered after creation, and the grantor can retrieve the trust assets.
• An irrevocable trust is final. The trust assets permanently belong to the trust and cannot be recovered.

Once assets have been transferred to an irrevocable trust, the trust becomes the owner of the assets, and thus, that portion of the estate is no longer subjected to inheritance or estate taxes.

It may sound excessive and even counterproductive, but this lack of flexibility is the buffer that protects an individual’s assets and those of their heirs from inheritance taxes and malicious lawsuits later in life.

4. Offshore banking

Offshore banking has become a popular way for investors to diversify their assets and protect their wealth when creating an estate plan. There are several benefits of offshore banking before even thinking about opening a trust:

• It reduces your federal tax burden by providing eligibility for foreign tax credits and tax exemption to reduce federal taxes.
• In countries that don’t impose taxes on worldwide assets, you can reduce your tax bill and avoid taxes such as wealth and gift taxes.
• You can protect your assets from economic and political turmoil in your home country.
• You can gain citizenship by investment if the assets are transferred to a country that offers citizenship in exchange for an economic investment.

Concerning offshore trusts, as briefly outlined, an additional layer of protection is added to trust assets held in an offshore bank. Many offshore banks also provide the option of opening an irrevocable life insurance trust.

5. Charity

One of the simplest ways to reduce inheritance taxes is to leave charitable donations in a will or transfer assets to charitable trusts.

In the UK, for example, allocating more than ten percent of the taxable amount to charitable lead trusts or nonprofit organizations (the same goes for political parties and local sports clubs) will reduce estate tax from 40 percent to 36 percent.

The ten percent only applies to the value over the taxable amount (£325,000). So, if £600,000 ($739,000) was left behind, the lower rate can be applied if more than £27,500 (ten percent of the amount over £600,000) is given to charity.

Although leaving money to charity isn’t a method of giving a larger portion of the estate to beneficiaries, charitable donations are a way to ensure that funds received from the sale of assets are spent in a way of your choosing.

6. Spousal exemptions

Spousal exemptions are another critical tool for reducing inheritance tax. They allow individuals to transfer assets to their spouse during their lifetime or upon death without triggering inheritance or estate tax.

Many countries, like Canada and the U.K., allow unlimited transfers between spouses tax-free. This is called the unlimited marital deduction. It defers any inheritance or estate tax until the second spouse dies, allowing more time for additional planning.

For example, in the UK, each individual has a £325,000 inheritance tax-free allowance. If the first spouse does not use their entire allowance, the surviving spouse can claim the unused portion, allowing them to pass on up to £650,000 tax-free.

7. Invest in tax-exempt assets

Investing in tax-exempt assets is another effective way to reduce the value of a taxable estate, thereby lowering inheritance or estate tax liabilities. Many countries offer specific tax reliefs or exemptions for certain assets, particularly those that contribute to the economy or serve social functions. These assets are often subject to reduced inheritance tax or are entirely exempt when passed to heirs.

Some countries offer tax relief on specific types of property. For example, in the UK, Agricultural Relief and Business Property Relief allow farmland or business assets to be passed on at a reduced tax rate or even tax-free under certain conditions.

For US tax payers, an option can be contributing to Roth IRAs. While Roth IRAs are made with after-tax dollars, the investments grow tax-free, and qualified withdrawals in retirement are also tax-free. This not only helps reduce taxable income during retirement but also keeps assets out of the taxable estate.

8. Succession planning

Another way to avoid inheritance taxes or reduce them is through succession planning. This process involves strategically organizing the transfer of assets, wealth, and ownership of businesses or property to heirs in a way that minimizes taxes, ensures smooth transitions, and preserves family wealth over generations.

With a solid succession plan, individuals can avoid large tax liabilities, ensure that their businesses or estates continue running smoothly after death, and reduce potential conflicts among heirs.

For instance, in countries such as Spain or Italy, entering into family agreements (e.g., Pacte de Succession) can help families plan the distribution of wealth while minimizing taxes. Countries like Japan provide relief for business owners who pass their businesses to heirs, often reducing or eliminating taxes on the transfer if the business is maintained for a certain period.

9. Create a Family Limited Partnership (FLP)

Creating a Family Limited Partnership (FLP) is another strategic and effective way to avoid inheritance taxes that US taxpayers can use. An FLP allows you to transfer business or investment assets to family members at a discounted value, reducing your estate’s taxable value. You retain control of the partnership while gradually gifting ownership shares

10. Lifetime gifts

Gifting during a lifetime is a common strategy to reduce inheritance tax liability by transferring wealth to heirs before death. Many countries allow individuals to give away assets or money during their lifetime without incurring taxes, either through annual allowances or lifetime exemptions. By making strategic gifts, individuals can reduce the size of their taxable estate, thereby minimizing the inheritance tax burden on their heirs. 

Many countries allow a certain amount of tax-free gifts per year. In the U.K., individuals can give up to £3,000 per year tax-free. On the other hand, in some countries, like Germany, lifetime gifts can be tax-free up to a specific limit, which renews every ten years. This allows substantial amounts of wealth to be transferred tax-free over time.

11. Obtaining citizenship/residency by investment

Avoiding or reducing inheritance tax through citizenship or residency by investment programs can be an effective strategy for high-net-worth individuals, especially if they move to countries with favorable tax regimes.

For instance, UK residents are subject to inheritance tax on their worldwide assets, meaning their global wealth can be taxed upon death. However, non-UK residents only pay inheritance tax on UK-based assets.

Therefore, individuals can avoid their global assets from UK inheritance tax by obtaining citizenship or residency through investment in countries that don’t impose inheritance tax, such as Antigua and Barbuda or St. Kitts and Nevis. This allows them to minimize tax liability, as most Citizenship by Investment countries either have no inheritance tax or only tax domestic assets, providing an effective solution for preserving wealth.

Is inheritance tax a common practice?

An inheritance tax is a rare practice in most countries. In 2023, less than 30 countries levy an inheritance tax on beneficiaries, ranging from four percent in Italy to 55 percent in Japan. This puts things into perspective when you remember that there are 193 United Nations member states worldwide. So, based on probability, most people worldwide don’t have to worry about paying inheritance taxes.

For example, China, Canada, and Russia have no inheritance tax. In Mexico, inheritance is treated as income under the income tax law and is tax-exempt for Mexican residents. Israel, Australia, and New Zealand previously had an inheritance tax but chose to abolish it in favor of simpler tax systems to encourage the creation of wealth, whether through investment or entrepreneurship.

In some countries with no inheritance tax, the only exception is the royalties paid to heirs (successors) of authors of literature, art, works of science, discoveries, inventions, and industrial samples, which can be subject to a personal income tax.

Inheritance versus Estate Tax

In recent years, there has been much debate over the merits of inheritance tax versus estate tax. An inheritance tax is imposed on heirs when they receive assets from a deceased person.

The amount of the tax is based on the value of the assets inherited. This type of tax can be seen as a way to prevent large sums of money from being passed down through families, and it often affects wealthier individuals.

On the other hand, an estate tax is imposed on the entire estate of a deceased person, regardless of who inherits the property. The amount of the tax is based on the entire estate’s value. This type of tax can be seen as a way to ensure that everyone pays their fair share, and it affects both the rich and poor alike.

Estate Tax in the United States

The United States federal government has a federal estate tax—also known as a death tax—that is imposed on a deceased person’s assets and property transfers.

Estate taxes are considered an outright tax, meaning the tax is charged on the entire estate regardless of who inherits the property. The American Taxpayer Relief Act of 2012 changed the federal estate tax rules so that for decedents dying after 31 December 2012, the minimum estate tax rate is 18 percent, and the maximum estate tax rate is 40 percent.

This includes a federal estate tax exemption (the amount that can be passed to heirs free of estate taxes) of $12.92 million as of 2023, increasing from $12.06 million in 2022. These changes to estate taxes are permanent and do not need to be renewed by Congress.

In addition to these changes in the death tax, there is a “portability” provision that allows a surviving spouse to avoid estate taxes by using any unused portion of their deceased spouse’s estate tax exemption in their estate plan. This provision reduces estate tax liability and applies to taxable estates, whether liable to federal or state estate tax, of decedents who die after 31 December 2010.

How Inheritance Tax Works in Different European Countries

Most European countries have some form of inheritance tax. This tax is levied on the beneficiaries of the decedent’s estate, with the money going to the state. Taxes vary from country to country. In some cases, it can be as low as one percent, and in others, as high as 50 percent of the inheritance value based on several factors.

Here is a comparison of inheritance tax by country in Europe.

United Kingdom

Beneficiaries: A spouse or civil partner of the decedent is exempt from inheritance tax in the UK.

All other beneficiaries are liable to pay the full rate of the tax.

Tax rate: The UK has a fixed inheritance tax rate of 40 percent.

Tax allowance: Inheritance under £325,000 is tax-exempt for all beneficiaries.

France

Beneficiaries: All beneficiaries are liable to pay inheritance tax in France, but the decedent’s children have a tax-free allowance of €100,000.

Tax rate: France has a tax band system that determines inheritance tax rates. The bands work as follows:

• €0 to €8,072 ($8,747) = 5 percent
• €8,072 to €12,109 ($13,121) = 10 percent
• €12,109 to €15,932 ($17,264) = 15 percent
• €15,932 to €552,324 ($598,500) = 20 percent
• €552,324 to €902,8380 ($978,000) = 30 percent
• €902,838 to €1.8 million ($1.95 million) = 40 percent
• €1.8 million plus = 45 percent

Tax allowance: There is no universal inheritance tax allowance in France, but the children of the decedent have a tax-free threshold of €100,000.

Italy

Beneficiaries: There are four classifications for beneficiaries in Italy:

1. Spouse or direct relatives (i.e., parents, children, grandchildren, and grandparents)
2. Siblings
3. Other relations up to the fourth degree of kinship
4. All other persons

Tax rate: Italy employs a variable tax rate approach for beneficiaries.

• Four percent for the spouse or direct relatives
• Six percent for siblings
• Six percent for other relations up to the fourth degree of kinship
• Eight percent for all other persons

Tax allowance: Tax exemption is also determined by the beneficiary’s relationship to the decedent:

• Spouse or direct relatives = €1 million exemption
• Siblings: = €100,000 exemption
• Other relations up to the fourth degree of kinship = No exemption
• All other persons = No exemption

Greece

Beneficiaries: Inheritance beneficiaries are categorized into three different groups in Greece:

• Category one: Spouse, parents, children, and grandchildren
• Category two: Grandparents, great-grandchildren, brothers- and sisters-in-law, parents-in-law, and children of the decedent from previous marriages
• Category three: All other family members who are not included in the above categories and do not have a kinship with the decedent

Generally speaking, Greece has a tax rate of one to ten percent for category one beneficiaries. The rates are applied as follows:

• €0 to €150,000 ($163,000) = tax-free
• €150,000 to €300,000 ($325,000) = one percent tax rate
• €300,000 to €600,000 ($650,000 = five percent tax rate
• €600,000 plus = ten percent tax rate

The inheritance tax rate varies for beneficiaries in categories two and three and can be as high as 40 percent.

Tax allowance: The standard tax allowance is €150,000; however, this only applies to category one beneficiaries. The spouse (after five years of marriage) and their minor children have a special tax allowance of €400,000. All other family members and individuals pay tax on all inheritance received.

Portugal

Beneficiaries: There are no inheritance taxes in Portugal for the spouse, children, grandchildren, parents, and grandparents of the decedent. All other beneficiaries are liable to pay stamp duty.

Tax rate: Stamp duty is charged at ten percent in Portugal.

Tax allowance: The surviving spouse, direct descendants, and ascendents are exempt from inheritance taxes in Portugal. Other beneficiaries may reduce their estate tax burden through Portugal’s double tax treaty with their home country.

Spain

Beneficiaries: There are four group classifications for beneficiaries based on their relationship to the descendent in Spain:

• Group one: Children under the age of 21
• Group two: Children over the age of 21, grandchildren, spouses, parents, and grandparents. Some regions may recognize unmarried partners registered under a pareja de hecho (domestic partnership).
• Group three: Siblings, aunts, uncles, nieces, nephews, in-laws, and their ascendants and descendants
• Group four: Cousins, all other relatives, unmarried partners (if the region allows it), and those who are unrelated

Tax rate: Spain has a progressive tax rate for inheritance.

• €0 to €7,993 ($8,661) = 7.65 percent
• €7,993 to €31,956 ($34,600) = 10.2 percent
• €31,956 to €79,881 ($86,500) = 15.3 percent
• €79,881 to €239,389 ($259,000 = 21.25 percent
• €239,389 to €398,778 ($432,000) = 25.5 percent
• €398,778 to €797,555 ($864,000) = 29.75 percent
• €797,555 plus = 34 percent

Tax allowance: Tax exemption is also determined by the beneficiary’s relationship to the decedent:

• Group one beneficiaries have a tax allowance of €47,859 ($51,800)
• Group one beneficiaries have a tax allowance of €15,957 ($17,300)
• Group one beneficiaries have a tax allowance of €7,993
• There is no tax allowance for beneficiaries in group four

Vulnerable people inheritance

In most countries that charge inheritance taxes, special tax treatment is generally provided to reduce the tax bill or avoid paying taxes on inheritances left to vulnerable people, such as children with disabilities.

The maximum inheritance allowance in France is €47,859 for group one beneficiaries; however, this can be as high as €50,253 ($54,400) for a disabled group one beneficiary, depending on the extent of the disability.

Inheritance and gift tax – known as Capital Acquisition Tax in Ireland – is levied on all beneficiaries of inheritance in Ireland at a standard rate of 33 percent. Disabled beneficiaries are eligible to claim qualifying expenses as expenses for healthcare, including the cost of maintenance associated with medical care, to reduce the taxable amount.

The maximum inheritance allowance in Italy is €1 million ($1.08 million) for a spouse and direct relatives (parents, children, grandchildren); however, this rises to €1.5 million for disabled children.

How Can Global Citizen Solutions Help You?

Global Citizen Solutions is a boutique migration consultancy firm with years of experience delivering bespoke residence and citizenship by investment solutions for international families. With offices worldwide and an experienced, hands-on team, we have helped hundreds of clients worldwide acquire citizenship, residence visas, or homes while diversifying their portfolios with robust investments. 

We guide you from start to finish, taking you beyond your citizenship or residency by investment application. 

Frequently Asked Questions about Inheritance Tax

How does Germany avoid inheritance tax?

Germans commonly reduce the taxable amount on inheritance by requesting a tax deduction on things such as funeral expenses and administrative fees.

Taxes are also avoided when estate planners pay larger amounts into retirement accounts, as money within a pension is exempt from German inheritance tax.

Additionally, as the tax rates and tax-free allowances for inheritance vary depending on the relationship to the decedent, they can ensure that the largest portion of their estate goes to relatives that receive the highest tax allowance along with the lowest tax rate.

Which European countries have no inheritance tax?

Regarding avoiding inheritance tax in Europe and reduce the taxable estate, the best way is to move your wealth to European countries with no inheritance tax, such as Austria, Cyprus, Estonia, Latvia, Malta, Portugal, Romania, Slovakia, and Sweden.

How does France circumvent inheritance tax?

A few ways French citizens and tax residents reduce the taxable estate and avoid estate taxes are:

• Opening a life insurance policy
• Transferring property before death
• Paying the gift tax before death
• Investing in real estate through an SCI (société civile immobilière) property holding company

How much can you inherit without paying federal taxes?

In the U.S., as of 2024, individuals can inherit up to $12.92 million without incurring federal estate taxes due to the lifetime estate and gift tax exemption. However, any amount exceeding this threshold may be subject to estate tax at rates ranging from 18% to 40%. Additionally, some states impose their own inheritance taxes with different exemption limits.

What are the best strategies to reduce inheritance tax legally?

The best strategies to legally reduce inheritance tax include:

1. Creating a Family Limited Partnership (FLP) 
2. Utilizing annual gift exclusions 
3. Taking advantage of spousal exemptions 
4. Making charitable donations 
5. Establishing trusts 

What are the legal implications of inheritance tax avoidance?

Inheritance tax avoidance involves legal strategies to minimize tax liability, such as using trusts or gifts. However, aggressive avoidance tactics may attract scrutiny from tax authorities and could be considered tax evasion if they violate laws. It’s crucial to ensure all strategies comply with current tax regulations to avoid legal penalties.

How can offshore accounts and investments help in inheritance tax avoidance?

Offshore accounts and investments can help avoid inheritance tax by placing assets in jurisdictions with lower or no inheritance taxes. These accounts can also provide privacy and asset protection, reducing the taxable value of an estate. However, they must comply with international tax laws to avoid legal issues, including potential penalties for tax evasion.