Metis AM
Inheritance Tax (IHT) receipts are on the rise, and more people than ever are falling into the IHT bracket.
According to government data, in the 2024/25 tax year, HMRC collected £7.6 billion in IHT – £0.8 billion more than the same period last year.
The government also predicts that the number of estates subject to IHT will rise by 1,400 in the 2028/29 tax year and 2,900 in the 2029/30 tax year.
While this is only a small increase, the BBC reports that around 27,800 estates pay IHT each year. So, the predicted future uptick does highlight that without proactive planning, your estate could become liable for IHT.
In particular, errors in IHT planning could lead to expensive and otherwise avoidable mistakes.
Here are four common IHT mistakes to be aware of and what you can do to avoid them.
1. Not using lifetime gifts could be a missed opportunity
One of the most common errors is failing to use lifetime gift exemptions to their full effect. Gifting money during your life can significantly reduce your IHT liability, but there are some important considerations to make before committing.
First, if you gift a large amount of money, your family will not usually need to pay any amount in IHT upfront. However, if you pass away within seven years, the gift may be liable for IHT.
If you live for more than seven years after you have given the gift, it is considered outside of your estate, so your family won’t pay IHT on it.
There are also some exemptions that make it possible to gift smaller amounts of money each year without incurring a potential IHT charge.
Annual IHT exemptions to be aware of
Each tax year, you’re permitted to gift up to £3,000 tax-free to anyone, even non-family members. This is your “annual exemption”, and gifts within this limit fall outside of your estate for IHT purposes. You can’t gift separate individuals £3,000; rather, the balance must be shared out.
Here are some other exemptions to be aware of:
- If you’re married or in a civil partnership, your annual combined exemption is £6,000.
- You can “carry forward” any unused annual exemption from the previous tax year, meaning you could gift up to £6,000 (£12,000 as a couple).
- You may only carry your annual exemption forward for one year.
On top of your annual exemption, you can also make specific one-off gifts, including:
- Gifting your child £5,000 for a wedding or civil ceremony
- Gifting a grandchild £2,500 for a wedding or civil ceremony
- Any other financial wedding gifts with a value of £1,000.
The wedding allowance exists in addition to your annual exemption.
Finally, you can gift up to £250 to as many people as you’d like each tax year, provided they haven’t received another financial gift from you.
These exemptions, which can reduce the value of your estate, are a powerful tool for IHT planning.
Let’s illustrate this with an example. Imagine a married couple who use their combined £6,000 exemption each year for 20 years while maintaining a comfortable standard of living. That equates to £120,000 removed from their estate, which could potentially lead to a £48,000 reduction in IHT, depending on their overall circumstances. This is assuming a 40% IHT rate.
If you were to also factor in a reasonable rate of growth on the funds gifted away, the effects could become even more profound.
2. Ignoring the nil-rate band and residence nil-rate band might cost your family more
The nil-rate band and the residence nil-rate band are crucial parts of IHT planning. Ignoring or failing to make the most of these bands could lead to an unnecessary IHT charge.
- The nil-rate band is currently £325,000
- The residence nil-rate band is currently £175,000.
Essentially, the nil-rate band allows you to pass a certain amount of your estate to your loved ones free from the standard 40% IHT rate.
Combined with the residence nil-rate band, you could potentially leave up to £500,000 to your loved ones tax-free.
Furthermore, if you’re married or in a civil partnership, you can also pass on any unused nil-rate band or residence nil-rate band to your partner when you pass away, or vice versa if you outlive them. This means you could potentially pass on up to £1 million without incurring any IHT.
Understanding the particular rules surrounding the nil-rate band and residence nil-rate band could make it easier to maximise their benefits.
For instance, if your estate is worth more than £2 million overall, the residence nil-rate band may be tapered down or disappear entirely. However, strategically gifting or trust planning can help reduce the value of your estate.
Proactive planning and professional advice could be essential here to avoid this common IHT mistake.
Read more: Ways to mitigate your tax liability if you’re planning on leaving your home to your children.
3. Failing to use trusts effectively could lead to further fees and complications
Trusts can be powerful tax-efficient tools for IHT planning, offering flexibility and control over how your assets are distributed.
Having a trust means you have essentially “locked away” a portion of your money for an intended beneficiary until a time of your choosing. You can also appoint a “trustee” whose job it is to manage the wealth on the beneficiary’s behalf.
Trusts can be useful for ringfencing a portion of your wealth, but they can be fairly complicated, and an improper setup could lead to unintended consequences.
Mistakes can include:
- Not understanding the tax implications of different trust types
- Not adhering to specific trust rules
- Creating trusts that don’t align with your overall estate plan.
Without expert guidance, trusts have the potential to create more problems than they solve.
A financial adviser can help you choose the right type of trust for your specific needs, ensuring you remain compliant with that trust’s regulations, and help you optimise your IHT position.
4. Not seeking professional advice can make matters more complicated
The complexities of IHT, including the nuances of trusts and various relief options, can be overwhelming. Seeking professional advice is not just another expense, but rather an investment in keeping your estate safe.
Having access to professional guidance could make it easier to navigate the intricate rules and regulations surrounding IHT. More than that, a financial adviser can help tailor solutions for your unique needs and circumstances.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
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, trusts, or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.