Common Inheritance Tax planning mistakes

Inheritance tax (IHT) planning can encounter many problems if not handled correctly. This article covers 10 mistakes that are commonly seen within the process.

1. Forgetting the Capital Gains Tax valuation uplift on death

One of the biggest inheritance tax planning mistakes is assuming lifetime gifting is always preferable.

Assets retained until death generally receive a Capital Gains Tax (CGT) uplift, resetting the base cost to market value at death. By contrast, gifting assets during lifetime can pass latent capital gains to the recipient, potentially creating significant future CGT liabilities.

In some cases, retaining an asset and paying inheritance tax can produce a better overall family tax outcome than gifting early.  The worst-case scenario is that CGT is paid on a gift which does not qualify for any reliefs, and then the donor dies within 7 years of the gift, potentially creating a “double tax trap”.

2. Triggering the “gift with reservation” rules

Giving assets away while continuing to benefit from them is a common trap.

This frequently occurs where:

• Parents gift a property but continue living there

• Income-producing investments are gifted while the donor still receives benefit

• Informal family arrangements are not documented correctly

Where HMRC considers benefit has been reserved by the donor, the asset can still form part of the taxable estate on death.

3. Assuming available reliefs automatically remove inheritance tax

Agricultural Property Relief (APR) and Business Property Relief (BPR) remain highly valuable reliefs but, unfortunately, they are no longer unlimited.

The combined £2.5 million APR/BPR allowance per person (transferable between spouses and civil partners) means:

• Farms and businesses may still suffer inheritance tax above the threshold

• Partial relief can still leave material tax exposure

• Asset qualification must be reviewed carefully

Families should no longer assume all farming or business assets pass entirely free of inheritance tax.

4. Accidentally resetting APR and BPR qualification periods

Lifetime transfers between spouses can sometimes create unintended consequences.

For example, transferring assets may restart ownership qualification periods for APR purposes. If the receiving spouse dies before the relevant ownership period is met, relief could be lost.

This is an area where some succession planning can actually create avoidable tax exposure.

5. Ignoring other taxes when gifting assets

Inheritance tax is only one part of the planning picture. Lifetime gifts can also create:

• Capital Gains Tax liabilities

• Stamp Duty exposure where debt or mortgages exist

• VAT complications in business or land transfers

Poorly coordinated gifting strategies can therefore create immediate tax costs while still failing to achieve the intended inheritance tax result.

6. Assuming all business or agricultural assets qualify for full relief

Unfortunately, not all assets qualify for 100% APR or BPR.

Common problem areas include:

• Investment-heavy businesses

• Excess cash reserves

• Furnished holiday lets

• Mixed-use land

• Older tenancy structures where only partial APR applies

Where only partial relief is available, the effective inheritance tax exposure may be far higher than expected.

7. Forgetting that life rarely follows the intended plan

Many inheritance tax strategies assume assets will pass between spouses in a particular order. However:

• A younger spouse may die first

• Family circumstances may change

• Business succession plans may fail

• Illness or incapacity may intervene unexpectedly

Estate plans should therefore be stress-tested against different family scenarios rather than relying on one intended outcome.

8. Assuming gifts become exempt immediately

Potentially Exempt Transfers (PETs) generally require survival for seven years before falling outside the estate entirely. Where death occurs earlier:

• The gift may still be taxable

• The recipient may face unexpected liabilities

IHT taper relief reduces the rate of tax payable on certain lifetime gifts if the person dies between 3 and 7 years after making the gift. It applies to gifts that become taxable because the donor died within 7 years. IHT is chronological and so most gifts are first covered by the nil rate band (currently £325,000). If the failed gift is within that allowance, the tax is already 0%, and taper relief cannot reduce any further.

Liquidity planning is therefore essential when making large gifts.

9. Failing to review wills and trust structures

Wills and trusts should evolve alongside legislation and family wealth.

Common issues include:

• Wills drafted before APR/BPR reforms

• Unused transferable allowances

• Trusts creating unexpected periodic charges

• Poor interaction with residence nil rate band planning

Outdated documentation can undermine otherwise effective tax planning.

10. Treating inheritance tax planning as a one-off exercise

Inheritance tax planning is rarely static. Asset values, legislation, business structures and family circumstances all change over time. Regular reviews are particularly important for:

• Family businesses

• Agricultural estates

• Property-rich families

• Complex trust arrangements

Without ongoing review, plans that once worked effectively can become inefficient or exposed.

If you would like to discuss your family’s financial future and gain reassurance in your IHT planning, please get in touch.  We are here to help.