5 Inheritance Tax myths that could undermine your legacy

Alongside pensions and retirement planning, Inheritance Tax (IHT) liability is one of the most common financial concerns people face.

Whether you're thinking about how to support your beneficiaries or trying to understand the implications of an inheritance you might receive, it’s important to have the facts.

Yet many aspects of IHT are widely misunderstood, from the thresholds at which it applies to what assets are actually taxed.

Read on to discover five common IHT myths that could undermine your legacy.

1. “Most people pay Inheritance Tax over £325,000”

The IHT nil-rate band for 2025/26 remains at £325,000, meaning the portion of an estate up to this threshold is not subject to IHT. As a result, many people assume that everything above this is automatically taxed at 40%.

However, according to the latest figures from the UK government, only around 4.3% of estates actually pay IHT. This is because, for many individuals and families, the effective threshold is significantly higher.

This is largely due to two key allowances:

• The residence nil-rate band – This lets you pass on an additional £175,000 to direct descendants if you leave them the home you lived in.

• Spousal exemptions and transferable allowances – These allow you to pass any unused nil-rate band and residence nil-rate band to your surviving spouse or civil partner.

So, if you’re married or in a civil partnership, you can potentially pass on up to £1 million before any IHT is due.

2. “Assets held in a foreign country aren’t liable”

Under the former non-dom tax regime, individuals were generally only liable for UK tax on income and assets located within the UK. Under this system, British expats and foreign nationals living in the UK who owned assets overseas often benefited from more favourable IHT rules in their country of residence.

However, from 6 April 2025, the UK scrapped the non-dom system and replaced it with a residence-based model. While there are transitional arrangements for existing non-doms, the reforms broaden the scope of UK tax to cover a wider range of foreign-held assets.

Under the new rules, foreign assets will be subject to UK IHT for individuals who have been UK tax residents for at least 10 out of the previous 20 tax years. This affects foreign nationals living in the UK, British expats abroad, and Brits with assets in foreign countries.

3. “You can only gift £3,000 a year”

The annual gifting allowance allows you to gift up to £3,000 each tax year without it being counted as part of your estate for IHT purposes.

If unused, this allowance can be carried forward by one tax year, enabling a total gift of £6,000. Couples can also combine their allowances, meaning together they could gift up to £12,000 without triggering IHT.

In addition to the annual allowance, several other types of gifts are exempt from IHT, including:

• Wedding or civil partnership gifts of up to £5,000, depending on your relationship to the recipient

• Gifts made from income, as long as they do not affect your standard of living

• Small gifts up to £250, provided they don’t form part of a larger gift to the same person

• Donations to charities.

As a result, many people are able to gift significantly more than £3,000 a year without increasing their IHT liability, provided they are compliant with the rules.

4. “If you gift your home, it won’t be considered part of your estate”

Many people believe they can help their beneficiaries avoid IHT on a property by gifting it more than seven years before they die, as this would normally remove it from their estate for IHT purposes.

However, if you gift your home but continue living in it, the property will still be considered part of your estate. This is known as a “Gift with Reservation of Benefit” (GWROB). In these cases, HMRC still considers the gift as part of your estate because you continue to enjoy the benefit of the property, and it remains subject to IHT. To avoid this, you would need to either move out or pay full market rent to the new owners.

If you're gifting a second home rather than your main residence, then it may fall outside your estate for IHT purposes after seven years.

5. “You don’t need a will if you’re married as your partner will inherit everything tax free”

Getting married or entering a civil partnership automatically revokes any existing will, unless you explicitly state otherwise in the document. In the absence of a valid will, your partner typically becomes your primary beneficiary under the rules of intestacy.

Many people assume that in this situation, everything will automatically pass to their spouse or civil partner IHT free, so they don’t update their wills after marriage.

However, the rules of intestacy may not divide your estate the way you intend, especially if you have children. Without a valid will, your spouse or civil partner will inherit only part of your estate tax-free, while the remainder will pass to your children.

The portion inherited by your children won’t benefit from the spousal exemption and could be subject to IHT. This means your estate could face an avoidable tax bill, and your loved ones may not receive what you would have wanted.

A financial planner can help keep your legacy efficient

A financial planner can help you cut through the complexity and myths of IHT and estate planning.

They can ensure you understand how the rules apply to your situation, identify potential reliefs or exemptions, and work with you to write your will and structure your estate so more of your wealth goes to the people you care about.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.