Top Inheritance Tax planning mistakes to avoid

The number of people paying Inheritance Tax (IHT) is on the rise, due in part to frozen thresholds and increasing property prices.

Government figures reveal that IHT brought in a record £8.2 billion for HMRC in the 2024/25 tax year, which is £0.8 billion higher than the same period in the previous year.

While you may not be able to prevent your beneficiaries from facing an IHT bill altogether, careful estate planning could help you pass on your wealth as tax-efficiently as possible.

In contrast, errors in IHT planning might lead to expensive mistakes.

Keep reading to learn four of the most common IHT mistakes and find out what you can do to avoid them.

1. Putting off creating an estate plan

Thinking about a time when you’re no longer here and considering how this could affect your loved ones might make you feel uncomfortable.

What’s more, if you’re relatively young and healthy, estate planning may not seem like a pressing need.

As such, you might be tempted to push this task down your to-do list and deal with it later.

However, no one can predict the future, and there may come a time when estate planning becomes urgent, such as if you suffer an unexpected illness or accident.

Unfortunately, without a clear plan in place, your loved ones might face unnecessary complications, stress, and financial losses.

In contrast, creating an estate plan now and keeping it up to date could reduce a potential IHT bill and ensure that your beneficiaries receive as much of your wealth as possible.

2. Not making use of gifting allowances and exemptions

Gifting money during your lifetime could be an effective way to reduce your IHT liability. Yet, many people fail to make use of their annual gifting allowance and exemptions.

There are four main ways to gift money tax-efficiently to your loved ones:

Annual exemption

You can give away gifts worth up to £3,000 in the 2025/26 tax year without them being added to the value of your estate for IHT purposes. If you are part of a couple and want to give away wealth together, you have a combined annual exemption of £6,000.

If you have any unused exemption from the previous tax year, you can carry this forward for one year.

Small gift allowance

This allows you to give as many “small gifts” of up to £250 each tax year as you want to – provided that you haven’t used another allowance on the same person.

Gifts for weddings or civil partnerships

You can give the following IHT-free gifts to someone who is getting married or starting a civil partnership:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person.

Gifting from surplus income

This allows you to pass on money directly from your income, and theoretically, there is no limit to the amount you can give in this way provided that:

• Payments are made regularly, rather than as a one-off event.
• You can maintain a reasonable standard of living while you’re making the gifts.
• Your gifts come from income, not from a transfer of capital assets.

A financial planner can help you navigate these complex rules to make the most effective use of your annual gifting allowances and exemptions.

3. Failing to use trusts effectively

Placing some of your wealth in a trust could be a useful way to take control of how your assets are distributed while also mitigating a potential IHT bill.

That’s because any assets you place in a trust technically no longer belong to you. As such, they aren’t usually included in your estate for IHT purposes.

There are many different types of trust, and it’s important to choose one that meets your specific needs. Some trusts carry an upfront IHT charge at a reduced rate, for example, while others allow you to maintain some control over the assets. That’s why it’s important to take financial advice before setting up a trust.

It’s also worth considering placing life insurance in a trust, as this could shield future payouts from IHT and ensure that your beneficiaries receive this money as quickly as possible.

A financial planner can help you understand the different rules and tax implications of each type of trust, so that you can make an informed decision about where to place your assets.

Read more: How you could use trusts to reduce a potential Inheritance Tax bill.

4. Not seeking professional financial advice

IHT planning can be complicated, and there are a lot of rules and regulations to keep track of.

Without expert guidance, you could make expensive mistakes or miss out on valuable opportunities to reduce your tax liability.

In contrast, a financial planner has the skills and knowledge to craft an IHT plan that meets your specific needs and preferences. They can help you pass on wealth, both during your lifetime and after you’re gone, in the most tax-efficient way possible.

So, if you’re looking for a financial planner in Bristol to support you and your family with all your estate planning needs, please get in touch.

Email helpme@aspirellp.co.uk or call 0117 9303510.

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, tax planning or trusts.