I'm an expert in taxation; be aware of these six expensive inheritance tax errors

In the years to come, more estates are expected to be required to pay inheritance tax; if you're one of them, there are a few easy mistakes to avoid

As more estates are brought under HMRC's purview, inheritance tax (IHT) receipts are predicted to increase even more.

The Office for Budget Responsibility (OBR) predicts that by 2030-2031, inheritance tax revenue will reach nearly 15 billion, up from 8.5 billion in 2025-2026.

The watchdog claims that the increase will be partially caused by frozen tax thresholds, rising equity and housing prices, and the effects of policies announced in the 2024 Autumn Budget, such as unused pensions falling under the purview of IHT starting in April 2027.

This implies that families might want to take action to guaranty the lowest possible IHT bill for their estates.

Watch the entire video here: According to Clare Moffat, a pensions and tax specialist at the retirement firm Royal London, many people are still making six expensive mistakes.

First.

Not being aware of the consequences of living together. getting wed. The nil-rate band is a tax-free threshold of £325,000 that each individual receives. Any portion of the estate that exceeds this limit may be liable to IHT.

For instance, there would be no IHT liability if you passed away and your estate was valued at £300,000.

Any unused nil-rate band is transferred to your spouse or civil partner upon your death, increasing their threshold to a maximum of 650,000.

There is an additional residence nil-rate band of 175,000 that can be transferred if a property is being passed to children or grandchildren. This could increase someone's IHT-free allowance to £1 million.

Nevertheless, you cannot transfer these bands if you are living with someone else; you must be married or in a civil partnership.

According to Moffat: "In my opinion, this is the most common mistake made by individuals in long-term relationships.

This implies that unmarried couples may lose out on an inheritance tax exemption of £1 million in total."

Two. failing to take full advantage of exemptions while you are still alive.

You can give money during your lifetime and it won't be included in your estate for inheritance tax purposes thanks to a number of exemptions and allowances.

For instance, you receive a £3,000 annual exemption every year. You may carry over any unused allowance to the following tax year, but only for one tax year, if you didn't use it all in the prior one.

Additionally, unless you have already used another allowance, such as the annual exemption, on that individual, you are free to give 250 cash gifts to as many people as you like each tax year.

As long as it comes from surplus incomethat is, money from dividends, rent, or pensionsand doesn't lower your standard of living, you can also give an unlimited amount of money.

When unused pensions fall under the purview of IHT starting in April 2027, gifting money from surplus income may prove to be a helpful strategy to lower inheritance tax obligations.

According to Moffat, "Giving during life is not for everyone, but for those who know they will have more than enough to live on when they're retired, the benefits are that you don't have to worry about the seven-year rule, you can stop at any time, and it can help family when they need it most."

According to the seven-year rule, you can donate as much of your estate as you like while you are still alive, and if you live for an additional seven years, the gifts won't be subject to IHT.

Three.

Not keeping documentation. It will be simpler for the executors of your will to provide proof when they have to pay the IHT bill if you keep thorough records of all the gifts you give throughout your life.

Many people don't act in this way. According to a study by the financial company Canada Life, 54% of people over 55 who had given money in the preceding seven years had not kept track of it.

When a person passes away, executors must report the entire value of their estate by filling out the IHT400 form. It must be completed with the IHT403 form in order to reveal lifetime gifts.

A longer wait for probate to be granted and a higher chance of HMRC inquiries could result from delays in this form-filling process, which would extend the estate's closure.

Forty.

Not having meaningful discussions. It's more crucial than ever to have open discussions with loved ones because IHT disputes within families are on the rise.

This can avoid accumulating legal fees and delays in the granting of probate, which would prevent you from managing the estate.

"Having good, open conversations about gifts or what a person wants and wishes for what happens after their death could prevent costly legal action at what is a difficult and emotional time for family, friends, and loved ones," says Moffat."

Five.

Forgetting the taper of two million. For every two million dollars that your estate is worth, the residence nil-rate band begins to decrease by one.

The 175,000 residence nil-rate band is totally lost once an individual's estate reaches £2.35 million. Once a surviving spouse's estate exceeds £2.7 million, they lose their residence nil-rate band entirely.

Moffat states: "Those who may be in this range should be aware of this since they will need to monitor the value of their entire estate.

"They could use some of the options to gift during their lifetime to lower it to less than two million, which would make the residence nil-rate band available once more."

Six.

Failing to take into account the source of inheritance tax. IHT may be due on a larger gift that is not covered by the gifting exemptions and surpasses your inheritance tax allowance, such as a house purchase for a child or grandchild, if you pass away within seven years.

If the bill is unexpected, the gift is tied up in property, or the gift has already been spent, the recipient might not be able to pay it.

The money donor could purchase a gift inter vivo life insurance policy to lower the risk of this. Should you pass away within seven years, this would pay the beneficiary's final IHT bill.

These policies typically pay out less over time because the IHT liability is subject to taper relief based on the date of gift.

For instance, a larger gift would be taxed at 40% if you passed away less than three years later, but the rate would only be 8% if you passed away six or seven years later.