Six inheritance tax myths debunked

The rules and regulations around inheritance tax (IHT) can be fiendishly confusing, complex and, if you’re not careful, costly.

Taking away hard-earned wealth after loved ones have passed away is unpopular to say the least. Many point out that IHT is a double taxation given that it’s likely other taxes will have already been paid on much inherited wealth such as income tax and capital gains tax.

Inheritance tax is levied at a rate of 40% on estates worth more than £325,000. There are ways to increase the tax-free threshold – for example the “main residence nil-rate band” raises the tax-free threshold by up to £175,000 to £500,000. Introduced in 2017, this rule exempts all or part of the value of the family home from IHT provided the beneficiary is a child or grandchild.

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In the 2024 Autumn Budget, Rachel Reeves said these bands will be frozen until 2030.

Other IHT announcements were made that will impact investors, those hoping to pass on pension savings tax-free to loved ones, and to the farming community passing on assets to the next generation.

Shares in eligible companies listed on the Alternative Investment Market (AIM) will no longer be entirely exempt from IHT. Pensions will no longer be exempt from IHT and instead will be counted as part of an estate for IHT purposes from April 2027.

And for those in agriculture, under the new proposals from April 2026, tax will be payable for the first time on inherited agricultural assets worth more than £1 million. The new IHT rate for these assets will be 20%.

There are ways to reduce your IHT tax bill and having a better understanding of the nuances of the levy, as well as who pays it, could help you avoid some potential pitfalls.

Here are six common IHT myths that we have debunked to help save you money.

Inheritance tax myths debunked

Myth 1: Inheritance tax raises a large amount of money for the government

Despite it being one of the most contentious taxes, the overall sum of money generated from IHT for the Treasury isn’t as high as many other tax levies.

HMRC collected a record £6.3 billion in IHT over the nine months to the end of December 2024 — £0.6 billion or 13% higher than the same period the previous year.

This compares to £9.8 billion for alcohol duty and £14 billion for stamp duty (and annual tax enveloped dwellings).

However, IHT receipts are rising all the time due to more estates being dragged into the IHT net. According to the government, this is likely due to a combination of higher volumes of wealth transfers following recent IHT-liable deaths, recent rises in asset values, and the freezing of the IHT tax-free thresholds. It could also be attributed to rising house prices.

The IHT tax threshold (or nil rate band) has been held at £325,000 since the 2009/2010 tax year, while asset prices, notably house prices have continued to rise. This has dragged more and more people into the IHT net, in a tax-raising measure known as fiscal drag.

Myth 2: Only the very wealthy pay inheritance tax

While IHT charges tend to hit families with more wealth, more average income households are likely to be dragged into the tax trap with rising house prices and the change to rules on pensions.

Rising house prices will mean some estates tip over the threshold. In areas like London and the south east, which have seen significant house price growth over the past three decades, the risk of having to pay IHT is even greater.

“Due to the rate at which property values have increased over the past few decades, many people who purchased their homes 30 years ago could now find that their assets exceed the IHT allowances,” explains Alex Hunt, legal director in Birketts’ private client advisory team.

Once pensions are counted as part of an estate, that too could assist with many more IHT bills.

Myth 3: A property can be gifted, meaning no tax will be payable on it

For most people, their house is the biggest asset they own, which means it’s likely if any IHT is due, it’ll be on the value of their main residence.

While there are certain reliefs available for those passing on their main residence, it’s not always possible to pass on a home without having to pay IHT.

One way to get around this issue is to pass on a home before it’s too late.

In practice, a property can be gifted to someone tax-free, according to James Ward, head of private clients at law firm Kingsley Napley.

“However, if the person gifting dies within seven years of making the gift the value of the gift will be added into their IHT calculation,” he says.

In addition, if the person gifting continues to derive a benefit from the property (in other words, carries on living there) then the value of the property will be subject to IHT at the date-of-death value.

“Other taxes may apply to a gift of property, for instance, stamp duty land tax and capital gains tax, so professional advice is important,” he adds.

To complicate matters, a property can be transferred between spouses or civil partners, but IHT will still be payable on the property on the death of the second partner.

Take a look at our article on how to reduce your IHT bill by gifting.

Myth 4: Inheritance tax only applies to property

There is a preconception that IHT only applies to property, and while a house may make up a significant portion of the total tax liability, almost every asset within an estate is liable.

Birketts’ Hunt says: “IHT applies to almost every asset with the available exemptions being very limited. By way of two examples of how niche most of the outright exemptions are, medals awarded for ‘valour or gallant conduct’ are outside of the scope of IHT, as are war savings certificates.”

There are a number of reliefs that can apply to other classes of assets, such as business and agricultural assets. However, the rules are changing for agricultural assets. Under the current rules, small family farms can be handed down without the need to pay inheritance tax. From April 2026, tax will be payable at a rate of 20% on inherited agricultural assets worth more than £1 million.

Myth 5: Assets abroad are not counted for UK inheritance tax purposes

If you live in the UK and are domiciled here your entire estate worldwide is potentially taxable on your death regardless of where it is situated.

Nigel May, tax partner at Gravita, says this includes holiday homes, foreign investments, and foreign bank accounts.

“The fact that there is a liability to death duties in another country does not mean that you have no liability to UK tax, although normally there is a ‘pecking order’ between countries. For example, if there is a liability to tax in Spain on a holiday home situated there, you will be given credit for the Spanish tax paid, so that you don’t pay tax twice. The rules are different for individuals not domiciled in the UK,” he adds.

Myth 6: Everyone will pay some form of inheritance tax

One of the biggest myths around IHT is that everyone will pay some form of the levy. Yet only a small percentage of estates have to pay.

Currently, just 4% of estates are liable for inheritance tax, though government estimates suggest that this will increase to 10% by 2030.

“The reality is that barely anyone pays IHT,” says Andrew Oury, partner at accountancy and legal firm Oury Clark.

Furthermore, the rate of tax paid is actually lower among larger estates than it is among smaller ones, where smart estate planning has been done and the various allowances used.

According to a study by Centre for the Analysis of Taxation, while a quarter of estates above £10 million paid IHT of 37% or above, another quarter paid less than 9%, and one in six paid less than 4%.

How to reduce your inheritance tax bill

Using estate planning tax allowances is important if you think your family will be caught in the IHT tax trap and want to minimise an IHT tax bill.

With that in mind, we’ve pulled together four strategies you can use to try and lower your IHT liability.

Make full use of any inheritance tax allowances

The current IHT system allows up to £175,000 of the family home to be passed on tax-free, which is effectively doubled to £350,000 when combined with the allowance of a spouse or civil partner. On top of this, the £325,000 standard nil-rate band is available, meaning it is possible to pass on £1 million IHT free as a couple.

Shaun Moore, tax and financial planning expert at Quilter says the band is strictly for those “with direct descendants to inherit the family home” and is capped at the value of the property being inherited – less any outstanding mortgage.

It’s also possible to pass on money tax-free via pensions, but not for long.

In the October Budget, Chancellor Rachel Reeves announced that inherited pension pots will be subjected to IHT from April 2027.

Until then, it is possible to pass on pensions tax-free, if you die before the age of 75. If you die after you’ve reached 75 they’ll normally be taxed at the recipient's marginal rate.

Gift wisely

Gifting is one of the most common ways people avoid IHT bills, owing to the number of concessions and freebies available. By doing so you can reduce the amount of wealth in your estate and therefore reduce the tax liability too.

Moore says: “Gifts between spouses or civil partners are completely free of IHT. In addition, each tax year, you can give up to £3,000 to loved ones, so as a couple this could be a combined £6,000 a year.”

You can also give any number of £250 sums to different people. For weddings and civil partnerships, a parent (including step-parents) can gift up to £5,000, grandparents or great grandparents can gift up to £2,500, and any other person can gift up to £1,000 – all IHT free.

Moore also highlights an exemption that allows you to give away any sum of money free of IHT, as long as it is from surplus income – in other words, you can afford the payments after meeting your usual living costs.

“There is no limit on excess income – above normal expenditure – that can be gifted,” he says.

Consider a transfer

Large gifts, including property, are classed as Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs), and their value will not be counted as part of the estate upon death, assuming the person who makes the gift lives for a further seven years.

Gifting and transfers to reduce the value of an estate are particularly beneficial for those with considerable wealth.

Where an estate is valued between £2 million and £2.7 million, the residence nil rate band is reduced by £1 for every £2 the estate is valued over £2 million. As such, an estate worth £2.7 million or more will not benefit from the residence nil rate band.

Moore says such transfers can be “particularly useful for estates of more than £2 million” as the gifts can immediately reclaim the extra band.

Think about diversifying

One of the ways the very wealthy reduce their IHT liabilities is to invest in different types of assets, such as shares listed on AIM. Under current rules if you hold shares for more than two years, those eligible are IHT-free.

From April 2026, however, AIM shares will no longer be entirely exempt from IHT. Chancellor Rachel Reeves announced in October that there would be a 20% IHT tax on qualifying AIM shares.

Investing in farmland is another option to mitigate IHT, though with the incoming changes following the Budget announcement to introduce IHT at 20% for agricultural assets above £1 million for the first time, this won’t be as attractive.

Investments under the Enterprise Investment Scheme (EIS) into private businesses (but not AIM businesses) and Seed Enterprise Investment Scheme (SEIS) can also be IHT-free. However, this is quite a complex area, and these investments may be unsuitable for most.

Make a will

Writing a will is an important starting point for IHT planning.

If you’ve already made one, it’s important to review it as your circumstances can change significantly over time – there might be a new marriage or divorce, the birth of children or grandchildren, and the setting up or selling of a business.

All these things can leave a will out-of-date and in need of updating.

Remember, wills don’t always cover pensions.

Make sure you complete an expression of wish form (also known as a nomination of beneficiary form) to be sure the right individuals benefit from your pension.