Inheritance tax used to be a worry for the wealthy, but now soaring numbers of bereaved families with modest estates are being hit with bills.
Families paid a record £8.5 billion between April 2025 and March 2026 alone – an increase of £200 million on the year before.
But experts warn that some bills could be avoided and result from families misunderstanding the inheritance tax rules.
These are the slip-ups that tax experts warn are most common – and how you can protect yourself from making them.
Misunderstanding the basics
Inheritance tax is paid at 40 per cent on your estate if its value exceeds your allowance – known as the nil-rate band – when you die. The nil-rate band has been £325,000 since 2009.
On top of the nil-rate band you also have a residence allowance of £175,000 you can use if you pass your main home on to your children or grandchildren.
Death duties: Families paid a record £8.5bn in inheritance tax between April 2025 and March 2026 alone – an increase of £200m on the year before
Spouses and civil partners can pass everything to their other half without paying inheritance tax and their allowances can be combined.
This means a married couple can pass on a family home up to the value of £1 million without incurring a bill.
At the moment, pensions are not part of your estate for inheritance tax purposes, but they will be from April next year.
Families who misunderstand the basic rules may needlessly worry that they could face a bill when the permitted allowances would be more than enough to cover the value of the estate.
Long-standing couples also frequently get caught out because they don’t realise that the ability to pass on wealth to your spouse is only afforded to those who are married or in a civil partnership.
Not keeping records
As many as 54 per cent of over-55s who have made gifts admit they didn’t make a note of it, research by insurer Canada Life has found.
However, keeping a record can help your loved ones prove that you were using your allowances when making gifts and therefore reduce or eliminate your tax bill.
For example, you can give away up to £3,000 a year with no tax liability, plus small gifts of up to £250 to as many people if you like.
If there is a wedding, you can gift up to £5,000 depending on your relation to the bride and groom. Make a note when you give these and it will help the administrators of your estate to calculate your bill.
Arguably the most generous inheritance tax allowance is where you make gifts out of surplus income because these fall out of your estate for inheritance tax purposes.
To qualify, gifts must be made regularly, out of income rather than capital and not affect your own qualify of life.
If you plan to use this allowance, make a note of when you make gifts so that your family can prove they were made regularly.
Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, says: ‘Any gifting should be accompanied with detailed notes so your family can provide evidence of who received what and when if they need to.’
If you don’t keep records, it may be hard for your family to show that you made gifts that made use of allowances and exemptions, so they could face a higher inheritance tax bill.
Not realising the taper relief rules
You may have heard of the seven-year rule for gifting. It states that gifts are free of inheritance tax so long as you live for seven years after making them.
If you die within that time, gifts may be subject to what is called taper relief – in other words a tax rate on a sliding scale from 40 per cent if it’s within three years and 0 per cent if you live for seven years.
However, Adam Vanstone, a chartered financial planner at Chester Rose Financial Planning, warns that not all gifts benefit from taper relief, as many people misguidedly believe.
Gifts made within seven years of death are called ‘failed’ gifts and are first counted towards your nil-rate band.
‘Taper relief only applies if the total value of gifts made in the seven years before death exceeds the £325,000 tax-free threshold, and it applies only to the excess,’ he says. ‘So, for most gifting over and above the allowances, taper relief will not apply.’
Say, for example, you give away £500,000 and die four years later with a remaining estate worth £1 million.
Many people assume that the £500,000 gift would be subject to tapering, so would be taxed at just 32 per cent.
However, in reality, the £500,000 gift would use up your £325,000 nil-rate band, with only the remaining £175,000 of the gift taxed at 32 per cent.
The gift would use up your full nil-rate band, so assuming you aren’t leaving property to a child or grandchild and therefore don’t have a residence allowance, your remaining estate of £1 million would be taxed at 40 per cent. This would result in a bill £40,000 higher than you’d expected.
Know your rights: Experts warn that some inheritance tax bills could be avoided and result from families misunderstanding the inheritance tax rules
Not truly giving something away
For a gift to be beyond the taxman’s reach you really must give it away. You can’t still enjoy any benefit from it.
‘It’s a common misconception that changing the title on your home and gifting it to your children will exclude it from inheritance tax calculations on your estate when you die,’ says Liz Hardie, a tax, trusts and estate planning expert at Canada Life.
‘In reality, if you still live in your home, then it can still be included in your estate as a “gift with reservation of benefit”, unless you pay a fair market rent to the recipient of the gift.’
Get this wrong and a £1 million home could land you with a tax bill of up to £400,000.
Living as joint tenants
If you own a property with someone and you aren’t married or in a civil partnership, you need to be very careful about how you structure the ownership.
The mistake from an inheritance tax perspective is to live as joint tenants, while the better choice is owning the property as tenants in common, says Ed Monk, at investing platform Fidelity International.
‘Were one partner to die, a property owned by joint tenants would be inherited by the surviving partner and may be subject to inheritance tax,’ he says.
‘Meanwhile, tenants in common can leave their share to children or in trust, which may help reduce the overall inheritance tax bill.’
Megan Rimmer, a chartered financial planner at Quilter Cheviot, says: ‘A common and costly error I see is a couple who have been together for decades and effectively live as though they are married, but they don’t benefit from the spousal exemption.
‘That can mean inheritance tax becomes payable, sometimes forcing the surviving partner to sell assets just to meet the bill.’
Forgetting downsizing perk
People who sell the family home to pay for long-term care often assume that they have forfeited their £175,000 main residence nil-rate band.
However, there is a downsizing addition, which means money raised from a house sale can still benefit from the extra £175,000 allowance even when that money is held in cash.
Ed Monk gives the example of someone who sells her home for £400,000 and moves into care. She invests the money and when she dies leaves a £700,000 estate.
With the downsizer addition, her £175,000 main residence nil-rate band still applies and, combined with her standard £325,000 nil-rate band, protects £500,000 of her estate.
So, the tax bill is £80,000 on the remaining £200,000. Without the additional allowance, the bill would have been £150,000.
Not considering your pension
From April 2027 pensions will become liable for inheritance tax, making it increasingly important to think about which financial wrappers your money sits in when you die, says Tony Woodward, a chartered financial planner at Quilter Cheviot.
‘The key planning question is increasingly about which wrapper different pots sit in at death, because pensions and Isas can be taxed in different ways,’ he says.
He gives the example of a higher-rate taxpayer who inherits a £100,000 pension from an estate that exceeds the nil-rate band after the April 2027 reforms come into force.
Of that sum, they would be left with just £36,000 – because it would incur inheritance tax at 40 per cent and income tax at 40 per cent after that.
The same £100,000 in an Isa would incur just £40,000 of inheritance tax, leaving the recipient with an extra £24,000.
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