Inheritance tax: four common myths debunked

John Rouse, partner in the Private Client team at Lodders Solicitors, debunks some of the most common myths surrounding IHT, including gifts, property and assets abroad.

Illustration of a hand putting a coin into a house

What are the current inheritance tax rates?

Inheritance tax (IHT) is the tax that is paid on someone’s estate when they pass away. All money, property and personal possessions form part of a person’s estate. The value of the estate will determine whether any IHT is payable.

The current rate of IHT is 40% and is only charged on the part of the estate that is above the threshold, also known as the nil-rate band. Everyone has a nil-rate band which is currently set at £325,000 until 5 April 2028. As everything above that threshold is taxed, larger estates can be subject to a substantial bill. 

Whilst there are planning strategies individuals can take to mitigate their tax liabilities, such as lifetime giving and post-death planning, the area of IHT is highly complex, with the rules governing it often causing confusion.

Inheritance tax myths

#1 “Only the very wealthy pay IHT”

With current IHT thresholds, for a married couple with children who own a house worth £350,000, there is a combined IHT threshold of £1m. 

There are tax mitigation strategies available, especially for individuals who own trading businesses and farmland. High net worth individuals can often set up their personal planning to utilise IHT reliefs, combined with an ongoing plan for gifting. However, for individuals owning over £500k, or couples owning over £1m in assets or property such as buy to let, then there is potential inheritance tax liability. 

This is especially so where the major asset is the home or with assets that produce an income upon which the owner relies on to maintain their standard of living. In these situations, it can be quite difficult to gift assets as this can result in insufficient income or capital gains tax liabilities on gifting assets.

Therefore, IHT liabilities often occur on the middle band of individuals whose estates exceed the IHT thresholds but without sufficient assets to justify the next level of IHT planning to mitigate their IHT liability.

#2 “A property can be gifted, meaning no tax will be payable on it”

A popular IHT planning strategy is to make gifts of assets. Where the asset is a property other than the main house, any gift will be a disposal for Capital Gains Tax (CGT) purposes, so a straight gift will often trigger a CGT liability.

The interaction between IHT and CGT is key to IHT planning, as potential CGT liabilities are one of the most common issues preventing the gifting of property. In certain circumstances, the use of discretionary trusts which qualify for CGT holdover relief can help to postpone any immediate CGT liability, but that can tend to move the potential CGT liability further down the line rather than eliminate it altogether.

It is also important to be aware of the reservation of benefit rules and the seven-year clock in relation to gifts. Generally, for a gift to be effective for IHT purposes, the person making the gift must survive by seven years. Also, they cannot continue to benefit from the property they have given away as, if they do, the asset will continue to be treated as part of their estate for IHT. For example, if a mother decides to give her house to her children and continued to live there, this would not be effective for IHT purposes. However, this could be overcome if the mother paid a full open market rent to her children.

#3 “IHT only applies to property”

IHT applies to all assets including someone’s:

  • home
  • cash
  • savings
  • investment portfolio
  • property

IHT reliefs are available against certain assets, such as an interest in a trading business or farmland, subject to certain criteria. The main asset which doesn’t attract IHT is someone’s pension fund. The recent pension changes announced in the last budget removed the lifetime allowance thresholds, providing an opportunity to add more assets to a pension fund. However, if someone draws on their pension fund, such as taking their 25% tax free lump sum, that can have the effect of bringing those assets back into their estate and potentially make them subject to a charge to IHT on their death.

#4 “Assets abroad are not counted for UK IHT”

UK IHT is payable by people domiciled in the UK (subject to some complicated tax rules on domicile) on their worldwide assets, not just UK assets. For example, foreign holiday homes are an asset subject to IHT on a UK domiciled individual. There may also be a tax liability in the country where the asset is located but there a number of Double Taxation Relief treaties with foreign countries to stop the same assets being taxed in both the UK and a foreign jurisdiction. 

About the author

John Rouse is a partner in the Private Client team at Lodders Solicitors. He specialises in advising business owners, farmers and high net worth individuals on estate planning including their wills, LPAs, personal tax, structuring their business, trusts and bloodline planning. 

See also

How to pay inheritance tax (IHT)

How do nil rate bands reduce inheritance tax?

What is Double Taxation Relief for inheritance tax?

What are the rules on gifts and exemptions for inheritance tax?

What to know about Capital Gains Tax

What you need to know about discretionary trusts in wills


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Publication date

11 October 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.