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Inheritance Tax (IHT) planning can be a practical way to pass more of your wealth to loved ones and ensure your estate reflects your wishes when you die.
However, the rules can be difficult to understand and navigate.
Research published by Canada Life found that 59% of UK adults find IHT rules confusing, while just 6% said their understanding was “very clear”.
Misunderstanding the rules could mean you overlook useful allowances and exemptions, or make decisions with costly and unintended consequences.
Continue reading to discover the truth behind five common IHT myths and how in-depth planning could help you leave more of your wealth to the people who matter most.
1. “Only the extremely wealthy pay Inheritance Tax”
It’s easy to assume that IHT is only a concern for people with considerable wealth. Yet, rising asset values and frozen tax thresholds could bring more estates into the scope of IHT.
In 2026/27, you can typically pass on up to £325,000 before IHT is due. This is known as the “nil-rate band”.
You may also benefit from the £175,000 “residence nil-rate band” if you leave your primary home to a direct lineal descendant.
So, you could potentially pass on up to £500,000 without incurring IHT. Better yet, your spouse or civil partner can usually inherit your entire estate without IHT and claim your unused allowances. This means you could collectively bequeath up to £1 million to your children, grandchildren, or any other beneficiaries you choose.
Unfortunately, there is a reason IHT is becoming a bigger problem for more families: the nil-rate band has remained frozen since 2009, and the residence nil-rate band has been frozen since 2020. What’s more, the government has confirmed that these nil-rate bands will remain fixed at their current rates until at least April 2031.
Meanwhile, the Office for National Statistics states that average UK house prices reached £273,000 in July 2026. This, combined with growth you may see from your other investments and savings, means the overall value of your estate is likely increasing and could explain why IHT receipts are rising.
So, even if you don’t consider yourself especially wealthy, it may be worth carefully assessing the potential value of your estate so your loved ones don’t face a higher-than-expected tax bill.
2. “You can leave your home to your children without paying Inheritance Tax”
The residence nil-rate band can make passing your home to children or grandchildren more tax-efficient. However, this doesn’t mean your property will automatically be free from IHT.
In fact, your home will still form part of your estate, as the residence nil-rate band simply increases your potential tax-free thresholds by up to £175,000 when you leave a qualifying home to direct descendants.
Additionally, the allowance gradually tapers by £1 for every £2 your estate exceeds £2 million.
You may think giving your home away during your lifetime could help you get around this, but there are important rules to keep in mind first.
For instance, if you transfer ownership to a child but continue living there without paying rent, HMRC may consider it a “gift with reservation of benefit”.
The property could then remain part of your estate for IHT purposes.
3. “There’s no Inheritance Tax to pay on assets held in a trust”
Trusts can be a practical way to control how and when assets pass to your beneficiaries. But placing wealth in a trust doesn’t automatically remove it from your estate straight away.
Depending on the type of trust, IHT may still be due when assets enter the trust, at 10-year anniversaries, or when assets leave it. For example, “relevant property trusts” could face a charge of up to 6% at each 10-year anniversary, as well as potential exit charges when assets are distributed.
Remember: trusts are incredibly complex estate planning tools, as each receives different tax treatment. As such, it’s essential to work with a professional.
A solicitor and financial planner could help you determine whether a trust is appropriate and if it would fit into your long-term financial plan.
4. “You can only give away £3,000 a year without paying Inheritance Tax”
The £3,000 annual gifting exemption is perhaps one of the better-known IHT allowances, but there are a few more than many overlook.
Here are some gifting strategies you could consider:
- You may be able to make regular gifts from your income, provided they form part of your usual expenditure and don’t affect your standard of living.
- Larger gifts to loved ones could also fall outside your estate if you survive for seven years after making them. These are known as “potentially exempt transfers”.
- You can give larger cash gifts for weddings and civil partnerships tax-free, depending on your relationship to the recipient.
If you pass away within seven years, the rate of IHT on the gift is measured on a sliding scale known as “taper relief”.
The Canada Life survey above found that just 15% of UK adults feel confident about how much they could gift each year, while 10% believed all gifts sit outside their estates.
Fully understanding the allowances and exemptions available to you could allow you to minimise IHT on your estate as much as possible.
5. “My pension isn’t included in Inheritance Tax calculations”
While pensions traditionally sit outside a person’s estate and aren’t subject to IHT, this is set to change. From 6 April 2027, most unused pension funds and death benefits will be included within your estate when calculating IHT.
The government website estimates that around 10,500 estates will face IHT liability in 2027/28 that previously wouldn’t have, while a further 38,500 are expected to pay much more following the change.
This could be a significant change if you have a sizeable pension pot and preserving it for loved ones forms part of your estate plan.
Read more: Only 8 months until Inheritance Tax rules change: Here’s what you need to know
It may be prudent to review how your pension fits into your plans well ahead of the changes to ensure everything remains suitable and aligned with your goals.
Get in touch
If need support reviewing your estate plan, we could help you explore appropriate ways to pass on your wealth tax-efficiently.
Email hello@sovereign-ifa.co.uk or call us on 01454 416653 to find out more.
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, or trusts.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
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.
Approved by Best Practice IFA Group Ltd on: 22/09/26