Inheritance Tax myth busting

The case of the Harrisons

Insight
Planning
Tax
Tax, wills, probate and power of attorney

Meet the Harrisons: John and Susan, a married couple in their late 60s, living in a £750,000 home in Cambridge. With adult children that have flown the nest, modest pensions, and some savings, they never considered themselves to be ‘financially wealthy’.

However, like many, they are unaware that their estate could be subject to Inheritance Tax (IHT). Below we explore common IHT myths through their situation.

Myth 1: “Only the wealthy pay IHT and there’s nothing I can do to reduce it.”

The Harrisons perception: The Harrisons never saw themselves as particularly wealthy – they’d worked hard, owned their home, and saved sensibly, but never felt that put them in the same league as those who should be worrying about Inheritance Tax. Even when they began to suspect their estate might be nudging over the threshold, they assumed there was little – if anything – they could do about it. IHT, in their minds, was just something that happened, and planning for it felt out of reach.

Reality: With the nil-rate band frozen at £325,000 since 2009 and rising property values, more estates like the Harrisons’ are being caught by IHT, in fact, IHT receipts for April 2024 to March 2025 hit £8.2bn, a £0.8bn rise from the same period last year. The residence nil-rate band may assist, but many middle-income estates are now within scope.

The Harrisons can benefit from several planning opportunities aimed at reducing the liability:

Making gifts, including clever use of annual gift allowances and regular gifting from surplus income.
Leaving a portion of their estate to charity.
Investing in qualifying business or agricultural assets that may attract reliefs.
Establishing trusts where appropriate.

However, each option requires careful planning and consideration of the wider estate and family circumstances.

Myth 2: “If I give everything away seven years before I die, there’s no IHT.”

The Harrisons perception: The family had always heard about the ‘seven-year rule’. As far as they were concerned, as long as they gifted their assets more than seven years before they passed, then they wouldn’t have to pay IHT. They didn’t realise that if you continue to benefit from something you’ve given away – like still living in your home – it might still be considered part of your estate.

Reality: Gifts made more than seven years before death may qualify as Potentially Exempt Transfers (PETs) and fall outside the IHT net. However:

If the donor dies within seven years, the gift is brought back into the estate and may be subject to tax.
Taper relief may reduce the tax due but does not apply to the value of the gift itself.
If the donor retains any benefit from the gift (e.g. continues living in a property rent-free), the gift will likely be treated as a gift with reservation of benefit and remain within the taxable estate regardless of the seven-year rule.
Outside of Inheritance Tax, local authorities will perform financial assessments if an individual needs care and support. They can assess deliberate deprivation of assets which would treat the individual as still owning the assets.

Example

In the Harrisons’ case, if John and Susan gift their home to their son but continue to live in the house rent-free, and they were to die within 7 years of making this gift, then the full value would still be exposed to IHT as this is a gift with reservation of benefit.

Additionally, gifts from surplus income are immediately exempt providing they meet certain conditions.

Example

In Harrisons’ case, Susan gifts £1,200 monthly to her daughter from her surplus pension income. She does not need this amount to maintain her usual standard of living. If the pattern and affordability are evidenced, these gifts can be exempt from IHT.

Myth 3: “My spouse or civil partner will have to pay IHT when I die.”

The Harrisons’ perception: When thinking about Inheritance Tax, the Harrisons assumed it applied to everyone – even between spouses. They had never really looked into the details and just assumed that when one of them passed away, the surviving partner might face a hefty tax bill.

Reality: Transfers between spouses and civil partners are generally exempt from IHT, including transfers made on death under the spouse exemption. Additionally, any unused portion of the nil-rate band and residence nil-rate band can usually be transferred to the surviving partner, potentially doubling the thresholds available on second death. Most spouses will have Wills that pass the majority of assets to each other, as long as this is the case, then IHT is usually more of a concern on the second death. It is important to check that the Wills are up to date and fit for purpose.

Myth 4: “IHT is automatically paid from the estate.”

The Harrisons’ perception: The Harrisons had always believed that Inheritance Tax would be settled automatically from the estate, with no action required from the family. Much like Income Tax being deducted at source, they assumed the process would happen behind the scenes during probate.

Reality: IHT is not automatically deducted. It is the executor’s responsibility to ensure the tax is paid, normally before probate is granted.

In the Harrisons’ case, if the bulk of their estate is tied up in their home, the executor may face challenges funding the IHT liability. Options include:

Executors may use the Direct Payment Scheme to pay from bank accounts.
Tax on some assets (e.g. property) may be paid in 10 annual instalments (plus interest).
Other options include taking loans or selling assets to raise funds.

Myth 5: "Assets abroad are not counted for UK Inheritance Tax purposes."

The Harrisons’ perception: The family assumed that anything held overseas – such as a holiday home or an investment account – would fall outside the scope of UK IHT. To them, foreign assets were governed by the rules of that jurisdiction, and they didn’t expect HMRC to have any interest in what was held abroad. They hadn’t realised that, as long term UK resident individuals, their worldwide assets would be considered part of their taxable estate.

Reality: Under the old rules, an individual’s IHT exposure in relation to overseas assets was dependent on their domicile. From 6 April 2025, this changed as part of the move to a residence-based system under the new Foreign Income and Gains (FIG) regime:

Individuals will be subject to IHT on their worldwide assets if they have been UK tax resident for 10 of the last 20 tax years before the chargeable event (e.g. death or transfer into trust).
A tail period will apply after leaving the UK, during which they may still be within the IHT net, which is between 3 and 10 years, depending on the length of prior UK residence.
Consequently, residence status instead of domicile status, will now determine IHT liability and the same rules apply to everyone, whether previously UK domiciled or not.

Example

In the Harrisons’ case, if Susan had previously lived abroad and held offshore investments, these would fall into the UK IHT net if she was UK resident for 10 of the last 20 years before her death.

Myth 6: "Trusts completely avoid Inheritance Tax."

The Harrisons’ perception: They had heard of families using Trusts to ‘protect’ wealth and assumed this meant removing assets from the reach of HMRC altogether. In their minds, once something was placed in a Trust, it no longer formed part of the estate – and therefore couldn’t be taxed. They hadn’t appreciated that Trusts are subject to their own Inheritance Tax rules and reporting requirements.

Reality: Trusts are not exempt from IHT. Most Discretionary Trusts are subject to:

An initial entry charge if assets transferred exceed the nil-rate band.
Periodic (10-year) charges.
Exit charges when assets leave the Trust.

Trusts can be an effective planning tool but require careful structuring and professional oversight. Often, control is the most desirable feature of a Trust, as the asset will leave the individual’s estate but the Trustees of the Trust retain control of the asset, including any income generated, until it is ultimately distributed to the beneficiaries.

Myth 7: "If I don’t make a Will, the Government will take everything."

The Harrisons’ perception: The Harrisons had always believed that dying without a Will didn’t matter, as they were married. So, the other spouse would get everything automatically, and then their children after that. They hadn’t been ready to face their own mortality and consider where they want their assets to go when they die. They were not aware of the intestacy rules and that, in some cases, the estate goes to the Crown (bono vacantia).

Reality: Without a valid Will, the estate is distributed according to the rules of intestacy- rules that determine who inherits and the proportion. This may not reflect John and Susan’s wishes. Intestacy prioritises spouses, children, and other close relatives. The estate only passes to the Crown where there are no surviving eligible relatives. Not leaving a Will can lead unintended outcomes, such as IHT on first death, assets being shared in ways that cause family disagreements or force the sale of property to divide funds.

How can Price Bailey help?

Our dedicated team specialises in Inheritance Tax planning for clients of all levels of wealth and complexity. Whether you live in the UK or you hold UK assets whilst living abroad, we offer expert advice tailored to your unique situation. We collaborate closely with financial advisors and solicitors to deliver a seamless, joined-up approach, often meeting with all parties together to streamline your planning process.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.