5 prevalent Inheritance Tax myths, busted


Older couple speaking with an adviser

Benjamin Franklin once famously stated that “nothing can be said to be certain, except death and taxes”. 

This statement can certainly be applied to Inheritance Tax (IHT) in the UK. FTAdviser reveals that HMRC collected £3.9 billion from IHT between April and September 2023, a £400 million increase from the same period a year prior.

However, while you may think that this is a considerable sum for HMRC and that it must raise much of its money from IHT, this isn’t the case compared to some of its other sources of revenue. This is actually one of many misconceptions about the tax that many people mistakenly believe to be true.

Continue reading to discover some of the most prevalent IHT myths, and why you shouldn’t necessarily take them at face value. 

1. “Inheritance Tax is reserved for the very wealthy”

One common myth regarding IHT is that only very wealthy people pay the tax.

However, this isn’t necessarily true. Everyone benefits from a “nil-rate band” of £325,000, meaning you can pass assets on to your next of kin up to this amount before IHT is due. 

Moreover, if you leave your main residence to a direct lineal descendant, such as a child or grandchild, you can benefit from the additional “residence nil-rate band” of £175,000. 

However, the government has frozen these thresholds until at least 2028. As the value of your assets increases, there’s a chance their overall value will be closer to that of the combined thresholds, and your loved ones could end up paying IHT when you pass away. 

For instance, house prices have been rising in recent years. Indeed, Which? reveals that average house prices in the UK rose from £263,333 in October 2021 to £289,923 by September 2023.

This, paired with the naturally appreciating value of other assets, could mean that more and more people will be pulled into paying IHT, not just the very wealthy. 

2. “My next of kin don’t pay Inheritance Tax on any gifts”

Gifting can be a helpful way to mitigate your IHT liability, but it’s important to note that the rules aren’t as simple as you may initially assume. Even though some gifts fall outside your estate for IHT purposes, they must meet specific criteria. 

First, your annual exemption means that you can make gifts up to a total value of £3,000 in the 2023/24 tax year, and these fall outside your estate.

Additionally, you can tax-efficiently make wedding gifts to your friends and family, though the amounts vary depending on how you know the individual getting married. In 2023/24, you can gift up to: 

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to anyone else. 

You can also make an unlimited number of small gifts of up to £250 each to as many people as you like, so long as you haven’t already used another exemption on the same person. 

What’s more, you can theoretically make gifts of any size that fall outside your estate for IHT purposes if you survive for seven years or more after giving them.

However, you may still face a tax charge if you die before this, and the rate depends on how soon you pass away after making the gift. This is called a “potentially exempt transfer” (PET). 

As you can see, any gifts you make may not be immediately free from IHT, and the rules can be somewhat complex. So, it may be worth seeking financial advice if you’re still unsure whether your gifts are free from tax. 

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.

3. “I can always pass my property on without my loved ones paying Inheritance Tax”

Your home may be the most valuable asset you’ll pass onto your next of kin after you die. And, while you can benefit from the residence nil-rate band, there is a misconception that you can always pass on your residence without paying IHT. 

However, if you had no assets other than your home, and its value exceeds £500,000 – the value of the nil-rate band and the additional residence nil-rate band combined – your loved ones could end up paying IHT on your home when you pass away. 

Your loved ones may be even more likely to pay IHT on your home if you have other assets, as the £175,000 threshold from the residence nil-rate band only applies to your home if it’s passed on to direct lineal descendants. 

The rules become even more complex if you gift your home while you’re still alive. Ordinarily, if you survive for seven years after gifting it, it falls outside your estate for IHT purposes under the aforementioned PET rule. 

However, the “gift with reservation of benefits” rules may apply if you gift your home. This means that if you continue to derive benefits, such as living in your home after you gift it without paying market rent, the standard seven-year rules no longer apply, and the property could remain part of your estate. 

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

4. “My family won’t pay Inheritance Tax on any assets in other countries”

If you have assets in other countries, namely a holiday home or foreign investments, you may think they wouldn’t be subject to the UK’s IHT rules.

However, this isn’t always the case. Normally, if you’re a UK resident and UK domiciled, your family would need to pay IHT based on the total value of your assets, including those held abroad. 

On top of this, there could be additional death taxes in the country in which you hold your assets. This can often make it complicated to work out your potential tax liability since multiple sets of rules from different countries can apply. 

5. “Inheritance Tax raises a considerable sum of money for the government”

IHT is often called the UK’s “most-hated tax”, and receipts have been rising in recent years. However, the idea that the government raises a vast amount of its revenue from IHT is misleading.

For instance, the Institute for Fiscal Studies (IFS) reveals that the total forecasted tax revenue in the UK for the 2023/24 financial year will be £1.06 trillion.

Of this, the same source predicts that HMRC will only raise £7.2 billion from IHT. However, it forecasts that the government will raise: 

  • £268 billion from Income Tax
  • £172.3 billion from National Insurance contributions
  • £162.2 billion from VAT.

As you can see, compared to other sources of revenue, the UK government doesn’t actually raise that much from IHT. 

Get in touch

If you still have concerns about how IHT may affect your wealth, we can help you mitigate your liability in several ways.

Please email us at info@investmentsense.co.uk or call 0115 933 8433 to find out more.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.