Major inheritance tax mistakes to watch out for as receipts hit £7.5billion (2024)

With rising house prices and frozen threshold, more and more families are facing being dragged into the inheritance tax net.

Less than four per cent of estates paid inheritance tax in 2020/21, but this is set to rise to more than seven per cent by 2032/33, according to the Institute for Fiscal Studies.

The levy is unpopular among the wealthiest Britons - in a survey of 2,000 people with investable assets over £250,000, 90 per cent said the IHT rate should be cut from 40 per cent to 20 per cent, the Saltus Wealth Index found.

Megan Jenkins, partner at Saltus, pointed out there are "already many options" for people hoping to pass on their wealth as efficiently as possible - such as through gifting allowances and giving away money during one's lifetime.

However, Britons may want to ensure they don't fall foul of a number of common inheritance tax mistakes.

Not knowing one's inheritance tax position

"Mitigating inheritance tax (IHT) is high on many people’s financial objectives, and while there are many ways to reduce IHT liability, they must be done right – any mistakes can not only impact the effectiveness of any tax planning but potentially leave the estate open to an unexpected IHT bill," Jenkins said.

However, she warned one of the biggest mistakes people make is not being aware of the inheritance tax thresholds, leaving many worrying about paying inheritance tax despite not being caught in the net.

Meanwhile, others have been totally unaware their estate will be subject to inheritance tax.

Jenkins explained: “In the UK, everyone is entitled to a Nil Rate Band of £325,000 and a Residence Nil Rate band of £175,000 if they pass their home to a direct descendant (e.g, children or grandchildren).

“This can also be passed between spouses if unused on death meaning a married couple who wish to leave their home to their children could have an estate up to £1million before IHT is due.”

Not having a Will

Another common mistake is failing to have an up to date Will in place. This could be particularly important if a spouse is passing their estate to the surviving partner for inheritance tax purposes.

"It is a common assumption that without a Will everything will automatically pass to the spouse, however, due to the rules of intestacy this is not the case," Jenkins said.
"Assets passed between spouses are entitled to an exemption for IHT, therefore it is important to have an up to date will to ensure you are able to make use of this.

“A Will is a way to control how the estate is distributed and ensure no unnecessary IHT is due.

"Without a Will, children would share in part of the estate and depending on the value of the assets, there could be a potential inheritance tax liability."

Misunderstanding gifting rules

A popular way to mitigate inheritance tax on parts of an estate above the threshold is by giving gifts.

Anything given outside of the inheritance gifts allowance could be subject to inheritance tax at a taper rate if it's above the threshold and given within seven years before death.

Jenkins said: "Everyone has an annual exemption of £3,000, as well as gifts out of regular income - it is with these ‘regular gifts’ that mistakes are often made.

“To be classed as a ‘gift out of regular income’, the gift must come from ‘surplus’ income not ‘capital’ and must leave the person making the gift able to maintain their standard of living. Therefore, if making the gift results in the person having to draw upon capital to make up for it, it wouldn’t qualify.

“The gifts must also be regular, for example, a monthly contribution into a grandchild’s savings account."

Keeping a paper trail is also key, Jenkins said.

She explained: "Many people make these types of gifts but fail to keep an ongoing record of them.
"To make use of this exemption it’s important to keep a record so the executors of the estate have evidence."

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Continuing to live in your home after gifting the home will mean the gift is ineffective for inheritance tax purposes

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Gifting your home

For those who want to gift their family home to their loved ones while they're still alive should watch out for some pitfalls.

“Gifting the family home to children or into trust and continuing to live in it is certainly possible but doesn’t have the IHT benefits people think," Jenkins said.

"Any gift to help mitigate IHT should be irrevocable and the person making the gift should have no ongoing benefit from it.

"Therefore, continuing to live in your home after gifting the home will mean the gift is ineffective.

“People often think that selling their home to their children at below market price could be a good way to gift the home without an IHT liability, but this is not as easy as it seems!
"HMRC would consider the difference between the market price and the sale price a gift for IHT purposes therefore, if the seller dies within seven years of the sale, the home would be brought back into the estate and potentially taxable.

“IHT mitigation is a complex form of tax planning and it’s essential to get it right. To avoid these common mistakes and get the best results, it is important to seek professional advice.”