5 Common Inheritance Tax Pitfalls and How to Avoid Them

Inheritance tax (IHT) can be one of the most complex and misunderstood areas of financial planning. Mistakes can cost your loved ones tens of thousands of pounds and create stress at a difficult time. At Chesterton House, we take a values-based, holistic approach, ensuring that your estate plan reflects your priorities, protects your family, and makes the most of available allowances.

Below, we explore five common pitfalls, practical ways to avoid them, and why a tailored approach matters.

1. Giving Gifts Without Considering Timing

Gifting money or assets during your lifetime can reduce the size of your estate and lower IHT. But the rules are nuanced. Gifts made less than seven years before death may still be liable for tax, and taper relief — which gradually reduces the tax on gifts made 3–7 years before death — applies only in specific circumstances.

Why it matters: A poorly timed gift could leave your heirs paying more than necessary.

Practical tip: Keep a clear record of all gifts, their value, and the dates they were made. Consider spacing larger gifts or structuring them to take full advantage of taper relief.

Example: A client gifted a property to their children, but did not plan the timing. By reviewing the gift schedule, we could adjust some transfers to fall outside the critical seven-year window, significantly reducing potential tax.

2. Overlooking Property Allowances

The main residence nil-rate band provides an additional IHT allowance when passing on your home, but it tapers for estates over £2 million. Many families don’t realise this allowance can be lost entirely if their estate exceeds the threshold.

Practical tip: Couples can combine allowances, and lifetime gifting or restructuring property ownership can preserve benefits. Planning ahead ensures your property is passed on efficiently and in line with your priorities.

Example: A couple with a high-value property risked losing the residence nil-rate band. By restructuring ownership and reviewing their wider estate plan, we were able to retain the allowance, saving their children thousands in potential tax.

3. Missing Out When Downsizing

Selling or downsizing a home doesn’t automatically remove the extra allowance. To benefit, certain conditions must be met, and claims must be made within two years of death.

Practical tip: Keep detailed records of property transactions and ensure any downsizing allowance is claimed correctly. This is where coordinated legal and financial advice is crucial.

Example: A client sold a family home to move closer to grandchildren but initially missed claiming the downsizer allowance. After applying the allowance correctly, their estate reduced the tax liability by tens of thousands.

4. No Will, No Clarity

Dying without a will can disrupt your planning, create disputes, and lead to unnecessary tax liabilities. A carefully drafted will ensures your estate is distributed according to your wishes, maximises allowances, and reduces stress for your family.

Practical tip: Review your will regularly, particularly after life changes such as marriage, divorce, or acquiring significant assets. Ensure your wishes are aligned with your values and family needs.

Example: One client’s estate plan included charitable gifts and family trusts. Without a clear will, these allocations could have been lost or delayed. Updating the will preserved their intentions and reduced tax exposure.

5. Property Ownership Choices

How you own property — as joint tenants or tenants in common — affects IHT liability. Married couples, unmarried couples, and blended families need tailored structures to maximise allowances and avoid unnecessary tax.

Practical tip: Consider ownership structure as part of a wider estate plan, particularly for high-value properties or complex family arrangements. Coordination between legal, tax, and financial advice is essential.

Example: A blended family owned a home as joint tenants. Changing to tenants in common allowed each partner to leave a share to their children, fully utilising individual nil-rate bands.

Why Values-Based Planning Matters

Inheritance tax planning isn’t just about minimising liability — it’s about aligning your estate with what truly matters to you. Our values-based approach looks at your entire financial picture:

• Your family’s needs and future security

• Charitable giving and philanthropic goals

• Personal priorities and life goals

• Tax-efficient strategies

By planning holistically, you can reduce stress, protect your legacy, and make confident decisions that match your values.

Get started today. Click here to arrange your free conversation with one of our qualified Financial Planners.

Disclaimer: This blog is for general guidance and educational purposes only. It does not constitute tax advice. Speak to a qualified financial planner or adviser for personalised recommendations.

 

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FAQs

What is the current nil-rate band for inheritance tax?

 The standard nil-rate band is £325,000 per person, with an additional residence nil-rate band of up to £175,000, subject to thresholds and tapering for estates over £2 million.

How does the seven-year rule work for gifts?

Gifts made more than seven years before death are generally exempt from IHT. Gifts made 3–7 years before death may qualify for taper relief, which gradually reduces the tax rate.

Can I pass my home to my children without paying IHT?

Possibly. Using the residence nil-rate band and appropriate ownership structures can reduce or eliminate IHT on your property, but timing and planning are crucial.

What happens if I die without a will?

Your estate will be distributed according to intestacy rules, which may not reflect your wishes and could result in unnecessary tax or legal complications.

Should unmarried couples consider tenants in common?

Often yes. It allows each partner to leave their share to their chosen beneficiaries, maximising allowances and reducing IHT liability. It’s essential to get good advice before acting to ensure that each partner continues to have a right to live in the property.