Thousands more families are expected to face Inheritance Tax (IHT) bills over the next few years as major pension changes and frozen tax thresholds pull more estates into the tax net. From April 2027, unused pension savings will start being included as part of a person’s estate for inheritance tax purposes, a move experts say could dramatically increase the number of families affected.
DIY Estate Planning Mistakes
Wealth management firm Evelyn Partners said many people are trying to reduce future Inheritance Tax bills themselves but warned that common 'DIY estate planning' mistakes could leave loved ones facing unexpected tax charges. Ian Dyall, Head of Estate Planning at the firm, said: “The taxing of unused pension assets at death from April 2027, together with the long term freeze on nil rate bands and gifting exemptions, mean that even more families will be drawn into paying this contentious levy.” Inheritance tax is normally charged at 40 per cent on estates worth more than £325,000, although extra allowances may apply depending on individual circumstances.
Failing to Update Wills and Pension Paperwork
Evelyn Partners warned that failing to update wills after major life events such as marriage, divorce or bereavement can create major problems for families. Older wills may also fail to take advantage of newer inheritance tax allowances, including the residence nil rate band which can allow people to pass on more of the family home tax free to children or grandchildren. Mr Dyall also warned pension savers to check beneficiary nomination forms on workplace and private pensions ahead of the April 2027 changes. He said in many cases it may make more sense for pension savings to pass to a spouse or civil partner because of inheritance tax exemptions.
Giving Away Money Without Thinking About Your Own Finances
The firm warned some people rush into gifting money or assets to children without properly considering their own long term financial needs. Evelyn Partners said retirees should make sure they can still comfortably afford future living costs and care needs before giving away large sums. There are also concerns some people may accidentally trigger other tax bills by selling investments or withdrawing pension savings purely to reduce inheritance tax exposure. The firm additionally warned HMRC has increased scrutiny of estate valuations, particularly involving property.
Giving the Family Home to Children but Continuing to Live There
One of the biggest misunderstandings around inheritance tax involves parents transferring ownership of their home to children while continuing to live in the property. Evelyn Partners warned this usually does not remove the property from the estate for inheritance tax purposes because HMRC may treat it as a “reservation of benefit”. That means the home could still face inheritance tax despite ownership changing hands. Mr Dyall also warned children could potentially face capital gains tax bills when the property is eventually sold.
Misunderstanding the Seven Year Gifting Rule
Many people believe gifts automatically become tax free after a few years, but experts warned the rules are far more complicated. Large gifts are normally treated as “potentially exempt transfers” and may only fall outside the estate completely if the donor survives for seven years. The firm said some families wrongly assume taper relief applies automatically, while others fail to realise gifts made within seven years of death can reduce the inheritance tax allowance available to the rest of the estate. In some circumstances, people who received gifts may even become responsible for paying inheritance tax themselves.
Unmarried Couples Not Realising the Risks
Evelyn Partners warned long term unmarried couples can face significant inheritance tax problems because they do not benefit from the same exemptions available to married couples and civil partners. The surviving partner may not automatically inherit assets tax free and could face large inheritance tax bills after a partner dies. Mr Dyall said in some cases surviving partners may even be forced to sell the family home to pay inheritance tax. He added that more couples have been discussing marriage or civil partnerships since inheritance tax changes affecting pensions were announced.
Choosing the Wrong Insurance Arrangements
The firm said more families are taking out insurance policies to help loved ones cover future inheritance tax bills. However, experts warned policies can create further problems if they are not properly arranged. For example, if life insurance policies are not written into trust correctly, payouts could still form part of the taxable estate and increase the inheritance tax liability further. Mr Dyall also warned some reviewable insurance policies can become dramatically more expensive later in life. He said: “More people are becoming aware of the inheritance tax risk hanging over the carefully saved assets they hope to leave to their loved ones.”
The inheritance tax threshold is currently frozen until 2030 and experts expect the number of estates paying the tax to continue rising over the coming years.
