Inheritance Tax Planning - Top 10 Common Pitfalls

Inheritance Tax (IHT) planning is often approached with good intentions but poor execution. Whether due to outdated advice, poor assumptions, or a lack of joined-up thinking, families can find themselves exposed to unnecessary tax liabilities. Some of the most common—and costly—pitfalls to watch out for are summarised below:

One of the most valuable tax benefits of holding assets until death is the Capital Gains Tax (CGT) uplift. When assets pass on death, their CGT base cost is reset to market value, eliminating any latent gain. Gifting assets during lifetime forfeits this uplift, meaning the recipient inherits the donor’s original base cost and may face significant CGT on future disposals. This is particularly relevant for property, shares, and other appreciating assets. Therefore, when considering how any IHT liability would be paid, including where gifts are made but the donor may not survive seven years, if assets are likely to be sold, it may be better to retain those assets if the IHT rate is 20% compared to current CGT rates of 24%.

Gifting an asset doesn’t always remove it from your estate. Under the GROB rules, if you continue to benefit from the asset—such as living in a gifted property or drawing income from gifted investments—HMRC will treat the asset as still part of your estate for IHT purposes.

What’s more, if a GROB is triggered, the asset is brought back into the estate at its market value at death, not the value at the time of the gift. This can significantly increase the IHT exposure, especially where the asset has appreciated. To avoid this, the donor must genuinely relinquish all benefit or structure the arrangement carefully—such as paying full market rent under a formal lease.

Gifting tenanted agricultural land to a spouse during lifetime may seem tax-efficient (to utilise two £1M allowances), but it can unintentionally disrupt eligibility for Agricultural Property Relief (APR). While transfers between spouses are exempt from IHT, APR requires the land to be owned for at least seven years if it is let to a tenant. A lifetime gift resets this ownership period, meaning the spouse must meet the full seven-year requirement from the date of transfer to qualify for relief. If the spouse dies before this period is met, APR could be lost—potentially resulting in a significant IHT liability. This highlights the importance of reviewing ownership timelines and seeking advice before making intra-family transfers of agricultural property.

Make sure you consider all the tax implications, not just IHT. Gifting can trigger other taxes such as:

• Capital Gains Tax (CGT): Gifts are treated as chargeable disposals at market value for CGT purposes, so tax may still be payable even where no proceeds are received, particularly where no holdover relief is available such as rental properties.
• Stamp Duty Land Tax (SDLT): If the gift involves property with a mortgage, SDLT may apply.
• VAT: Transferring a VAT-registered business or property may require careful handling to avoid unexpected charges – this is discussed in Richard Taylor’s article.

Many people assume that transferring £1 million worth of land to a spouse or another family member will automatically secure full IHT relief under APR or BPR. But this only works if the land fully qualifies.

If the land only qualifies for partial relief—for example, under an old Agricultural Holdings Act (AHA) tenancy where only 50% APR is available—then the full £1 million value won’t be covered. That means you could end up using your relief inefficiently and still face a significant IHT bill.

To make the most of the £1 million cap, you need to ensure that the entire value of the asset qualifies for 100% relief.

Otherwise, you’re giving away £1 million but only shielding half of it from tax.

People don’t always die in the “right” order. If assets are expected to pass from one spouse to another before reaching children, but the younger spouse dies first, the plan may unravel. Life insurance can be a useful tool to protect against this risk and ensure liquidity for IHT liabilities.

Gifts only start to fall outside the estate if the donor survives three years (for taper relief) and seven years for full exemption. Premature death can bring the gift back into the estate, so consideration should be given to how the donee might settle the tax if this happened.

Don’t assume reliefs will be available. Businesses evolve—what was once a trading enterprise may now be largely investment-based. APR and BPR are only available for qualifying activities, and HMRC scrutinise claims closely. Regular reviews are essential, especially if the business model or ownership structure has changed.

Wills should be reviewed regularly to ensure they align with current legislation and planning goals. For example, failing to structure bequests to utilise the RNRB or £1M allowance can result in unnecessary tax. A well-drafted Will is a cornerstone of effective IHT planning.

Trusts can be powerful tools, but they come with their own tax regime—including 10-year anniversary charges and exit charges. Understanding the long-term implications of trust structures is vital before committing – see Abi Kingsbury’s article for a more detailed review of this area.

IHT planning is not a one-time exercise—it’s a dynamic process that must evolve with family circumstances, legislation, and asset profiles. The cost of getting it wrong can be significant, but with careful planning, regular reviews, and professional advice, families can protect their wealth and pass it on efficiently.

If you’re unsure whether your current arrangements are watertight, now is the time to revisit them—before the next budget or life event forces your hand.