Planning for your death is unlikely to be a cheery task to tick off your to-do list, but as the rules keep changing and tax thresholds remain frozen, tackling it is more important than ever.
Families paid a record £8.5 billion in inheritance tax in the 2025-26 tax year — 3.6 per cent higher than the £8.2 billion the year before, according to HM Revenue & Customs.
The Office for Budget Responsibility, the spending watchdog, estimates that the government will raise £14.5 billion a year by the 2030-31 tax year.
Inheritance tax is paid at a rate of 40 per cent on the value of your estate above the inheritance tax-free allowance (also known as the nil-rate band) of £325,000. Most people get an additional £175,000 residence allowance if their main home is left to a direct descendant (a child, stepchild or grandchild) and their estate is worth less than £2 million.
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Anything left to a spouse or civil partner is exempt from inheritance tax, however, and couples can also inherit each other’s allowances. This gives a couple a total of £1 million that they can pass on inheritance tax-free. Pensions are typically exempt but are set to become part of your estate for tax purposes from April 2027.
While there are also generous gift allowances to take advantage of and ways to reduce your bill, there are pitfalls to dodge. Here are six costly inheritance tax mistakes to avoid.
1. Ignoring your will
Unfortunately, writing your will is a job that is never really complete.
“Failing to update your will can result in assets passing to unintended beneficiaries and may also create unnecessary tax liabilities,” said Ian Dyall from the wealth manager Evelyn Partners.
For example, older wills may not work as intended because of changes to inheritance tax rules, such as the one about who you leave your home to. Make sure this is explicit in your will.
Dyall said: “The value of each spouse’s estate is also important to consider, because if either is worth more than £2 million then the residence allowance will be tapered away. Rearranging the assets could lead to a big tax saving.”
The residence allowance is reduced by £1 for every £2 of an estate’s value above £2 million. You lose it altogether once your estate is worth £2.35 million or more.
If you own businesses, look at your will again in light of the cap on business and agricultural property relief that was introduced in April. Qualifying assets now get 100 per cent inheritance tax relief on the first £2.5 million, with anything above that receiving 50 per cent relief.
Married couples and civil partners can inherit each other’s business and agricultural relief allowance.
2. Getting the sums wrong
You need to be wary when calculating your inheritance taxGetty IMAGES
Over or underestimating your inheritance tax liability — and then giving away to much or too little during your lifetime — is a typical error, according to Rachael Griffin from the wealth manager Quilter.
She said: “Mitigation has its place, but it should not come at the expense of financial security in later life. At the other end of the spectrum, some people underestimate their exposure and miss straightforward planning opportunities.”
A financial adviser can map out your expected income, expenditure and potential shocks over time to pin down how much you can afford to give away now to reduce your inheritance tax bill. There are a number of ways to give away money and it fall immediately out of your estate for inheritance tax purposes, such as the £3,000 annual gift allowance, and these can help reduce the value of your estate gradually.
3. Not keeping records
If you do decide to give away money or assets during your lifetime, it is crucial that you keep detailed records of all transactions. Gift exemptions only apply to what the taxman considers true gifts.
This means that you must give up all access and benefits to the asset — you cannot transfer ownership of your home but continue to live there rent-free, or give away an expensive piece of artwork but keep above your mantelpiece. HMRC calls these “gifts with reservation”, and classes them as part of your estate.
Joseph Adunse from the accountancy firm Moore Kingston Smith said: “HMRC will actively seek evidence that the donor has truly given up all benefit and control. Careful documentation and ensuring no benefit is reserved are essential to avoid costly tax pitfalls.”
4. Misunderstanding the taper
Most people understand the “seven-year rule”: give, live for seven years and the gift becomes inheritance tax-free.
However, there is a taper attached to the rule that makes it slightly more complicated. It means that the tax that may be payable on a gift reduces on a sliding scale once you have lived for three years after making it. Die after three years and the rate will be 32 per cent, after four it will be 24 per cent, after five it is 16 per cent, and after six it is 8 per cent.
In practice, though, gifts given in the seven years before you die don’t benefit directly from taper relief. Instead, they are pulled back into the estate, using up your tax-free £325,000 in the order they were given, meaning that less of your remaining estate can be passed on free of inheritance tax.
Griffin said: “From a planning perspective, remember that the order and size of gifts matters. It is worth thinking about spreading gifts over time where possible.”
5. Not getting married
Getting married can be a smart move tax-wise Getty images
In the modern world, little separates married couples from long-term, unmarried couples who live together — but not when it comes to tax.
“It might come as a surprise to those in long-term, unmarried relationships that you cannot make significant gifts to each other without tax consequences,” Adunse said.
The only protection when an estate is left to an unmarried partner is the £325,000 allowance. Assets can only pass between couples entirely tax-free if they are married or in a civil partnership, and the £175,000 residence allowance only applies to direct descendants.
Even if a main home is jointly owned, the share of the property that is left to the surviving partner will use up some or all of the £325,000 tax-free allowance.
According to Dyall, the worst situation is when a home is solely in the name of the deceased. If they had a £1 million property, their surviving partner would need to pay £270,000 to stay in the house. Were they married they would pay nothing.
6. Choosing the wrong life insurance
The rising threat of inheritance tax is driving more families to take out life insurance to cover their future tax bill.
In theory, the plan is simple: take out a whole-of-life policy that will pay out an amount similar to your inheritance tax liabilities when you die, meaning your beneficiaries can inherit your estate without any extra drama, such as having to sell your home.
For the plan to work, the life insurance must be put into a trust. This legal arrangement ensures the payout sits outside of your estate and can be passed on tax-free. It is worth using a solicitor to ensure this is set up correctly.
Dyall said: “It is essential to choose the right policy and importantly, to put it into trust. If you are married, then a ‘joint life, second death’ policy is usually best. Both lives are insured, but because assets pass free of tax between spouses at first death, the policy only pays on the second death.”