Along with retirement and pension planning, Inheritance Tax (IHT) mitigation is often one of the cornerstones of a financial plan.
Despite it being a key concern, there are still many misconceptions regarding IHT that could mean you end up paying more than necessary and miss opportunities to pass on wealth to your beneficiaries efficiently.
Whether you’re preparing to leave assets to your loved ones or expecting an inheritance, having an accurate knowledge of how IHT works is important for mitigating it.
Read on to discover five widespread IHT myths and how being aware of them could help improve your efficiency.
1. “Anything over £325,000 is automatically taxed at 40%”
The standard IHT threshold – the “nil-rate band” – is £325,000 in the 2025/26 tax year. However, only around 4% of estates pay IHT, as most have a significantly higher threshold than the nil-rate band.
This is because the residence nil-rate band allows up to an extra £175,000 to be passed on if you leave your home to your children or grandchildren. Moreover, spousal and civil partner exemptions mean any unused allowance can be transferred to your partner, potentially doubling your combined tax-free limit.
Altogether, these additional allowances mean that individuals can pass on up to £500,000 IHT-free, while married couples and civil partners can collectively pass on up to £1 million.
As such, many estates don’t start paying 40% IHT on anything over £325,000.
2. “Assets held abroad aren’t subject to UK IHT”
Under the old non-dom tax regime, individuals who were considered non-domiciled in the UK could have overseas assets that weren’t under the scope of UK IHT.
However, as of 6 April 2025, the rules have changed.
The UK is phasing out the non-dom rules and now applies a residence-based system for IHT. If you’ve lived in the UK for 10 out of the past 20 tax years, your global estate, including foreign assets, may be subject to IHT, even if you’re no longer a UK resident.
So, if you’re a foreign national living in the UK or a British expat living abroad, it’s a good idea to seek financial advice to find out how the new rule changes could affect you.
You can read more about the new system in our previous article on the topic.
3. “I’m only allowed to gift £3,000 a year tax-free”
While it’s true there’s a £3,000 annual gifting exemption, that’s not the full story. There are a range of other ways to give away more without incurring IHT.
For instance, if unused, the £3,000 limit can be carried forward from the previous year, which can double your allowance to £6,000. Moreover, couples can combine their allowances, meaning they can collectively gift up to £12,000 a year together.
Beyond that, other gifts can also be exempt from IHT including:
- Wedding gifts of up to £5,000 depending on your relationship to the recipient
- Gifts from surplus income, provided they’re regular and don’t affect your standard of living
- Small gifts of £250, as long as they’re not part of a larger gift
- Charitable donations.
These exemptions allow you to support your loved ones while also strategically reducing the size of your taxable estate, mitigating the total amount of IHT it will be liable for.
4. “Giving my house away will remove it from my estate”
Passing on your home might seem like an easy way to reduce your IHT liability.
However, if you continue living in the property without paying full rent, HMRC may treat it as a “gift with reservation of benefit”. In this instance, the home will remain part of your estate for IHT purposes, even if legal ownership has changed.
To ensure the gift is effective you must either move out or pay market-rate rent to the new owner.
This rule generally doesn’t apply to second homes, which may leave your estate completely after seven years of you gifting it, provided no benefit is retained.
5. “My spouse inherits everything anyway, so I don’t need a will”
Many people assume that their partner will automatically inherit their full estate tax-free. But this is only partially true, and it depends on whether you’ve left a valid, up-to-date will.
In the absence of a will, the rules of intestacy apply. These rules may divide your estate between your spouse and children, and only the portion inherited by your spouse is tax-free.
Furthermore, getting married or entering a civil partnership automatically invalidates any previous will, unless it’s explicitly worded to remain valid.
So, without an updated will in place, you could lose control over how your assets are distributed and miss tax-saving opportunities in the process.
A financial planner can help you avoid costly IHT pitfalls
IHT rules are nuanced and are often subject to change and adjustments. Mistakes, misconceptions, or assumptions could leave your estate with an unexpected tax bill or lead to outcomes that don’t reflect your true wishes.
A financial planner can help you create an estate plan that maximises your efficiency and protects the transfer of your wealth to your loved ones.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
