5 myths about Inheritance Tax debunked

An older couple looking at a computer and a document.

Inheritance Tax (IHT) planning often ranks high on the list of financial concerns, but many people still have misconceptions about how it works.

Whether you’re planning to leave something behind for loved ones or are set to receive an inheritance yourself, understanding the ins and outs of IHT is important for ensuring efficiency.

As inherited wealth can be significant, being clear on the rules and technicalities could help save you a considerable amount.

So, read on to discover five common IHT myths and the facts that debunk them.

1. “Everything over £325,000 gets taxed at 40%”

The standard IHT nil-rate band, which is the amount of an estate that’s tax-free, is £325,000 in the 2025/26 tax year. As such, many people assume that anything over this is charged IHT at 40%.

But in reality, only a small number of estates are subject to IHT. Indeed, the latest figures from the UK government reveal that just over 4% of estates actually end up paying it. This is despite a report by NimbleFin that shows the average UK estate to be worth over £334,000, which is more than the nil-rate band.

So, how can this be?

Well, this is largely because many people benefit from additional allowances that can significantly increase the threshold at which you pay IHT, including:

  • Residence nil-rate band – This allows you to pass an additional £175,000 to your children or grandchildren if you leave them your main home.
  • Spouse or civil partner exemptions – Unused nil-rate bands can be passed between partners, effectively doubling your collective threshold.

Together, these reliefs can allow a married couple or civil partners to pass on as much as £1 million without incurring IHT.

2. “Foreign assets are safe from UK Inheritance Tax”

Under the old non-domiciled (non-dom) tax system, UK IHT generally only applied to UK-based assets for those considered non-doms. This allowed many foreign nationals or British expats to hold overseas assets outside the UK tax net.

However, from 6 April 2025, the UK has moved to a residence-based system, which has significantly expanded the reach of IHT.

Now, individuals who have been UK tax residents for at least 10 of the last 20 tax years may find their global assets subject to UK IHT, even if they live abroad or hold foreign citizenship.

3. “I’m only allowed to gift £3,000 a year”

While there is an annual IHT gifting allowance of £3,000, it’s far from the only tax-free gifting option available.

Here’s what many don’t realise:

  • You can carry forward unused allowance from the previous tax year, meaning you can gift a maximum of £6,000 each year
  • Couples can combine allowances, allowing you to collectively gift up to £12,000 in one year without triggering IHT.

In addition to the annual exemption, other tax-free gifts include:

  • Wedding or civil partnership gifts of up to £5,000 depending on your relationship to the couple
  • Regular gifts from income, provided they don’t adversely affect your standard of living
  • Small gifts of up to £250, as long as it’s not part of a larger gift.
  • Charitable donations.

These allowances enable you to pass on more wealth during your lifetime without increasing the tax burden on your estate.

4. “If I give away my house, it doesn’t form part of my estate”

Gifting your home might seem like a simple way to reduce your IHT liability, especially if you do it more than seven years before you die, but it’s not that straightforward.

If you continue to live in the property after gifting it and don’t pay full rent, HMRC considers it a Gift with Reservation of Benefit (GWROB). This means the property is still treated as part of your estate and remains subject to IHT.

To avoid this, you must either move out permanently or pay market-rate rent to the new legal owner.

This doesn’t apply to second homes, in which case the gift could fall outside your estate after seven years.

5. “My spouse will inherit everything, so I don’t need a will”

It’s a common belief that if you’re married, your partner will automatically inherit your entire estate and that it will be free from tax. But this can be misleading.

Marriage or civil partnership voids any existing will, unless otherwise specified in the document. Without a new, valid will in place, the rules of intestacy apply.

These rules state that:

  • Your spouse or civil partner will receive part of your estate tax-free
  • The rest may be divided between your children
  • Anything left to children or other beneficiaries does not benefit from spousal IHT exemptions, potentially triggering a tax charge.

So, without a properly structured will, you could miss certain tax-efficient opportunities and risk assets not being distributed the way you intended.

A financial planner can help you avoid costly Inheritance Tax mistakes

IHT can be complex and misconceptions can lead to costly mistakes. A financial planner can help you make sense of the rules, identify allowances, and build a tailored estate plan that mitigates IHT and maximises what your loved ones receive.

To speak to a financial planner, get in touch.

Email info@blueskyifas.co.uk or call us on 01189 876655.

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, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.