Thousands of families in the UK are at increased risk of facing inheritance tax (IHT) liabilities due to a prolonged freeze on IHT thresholds and upcoming changes to pension treatment in estate calculations set to take effect next April. Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, noted a rising demand for professional guidance as families navigate the complex and often confusing IHT rules.

Dyall identified five common mistakes that individuals make when attempting to manage their estates independently, which can result in significant, avoidable tax burdens for their heirs.

One critical error is failing to keep wills and family trusts current. Dyall emphasized the importance of reviewing these documents regularly, particularly after significant life changes such as marriage, divorce, or the death of a beneficiary. Without updates, assets may unintentionally pass to the wrong people or trigger unintended tax consequences.

Another frequent pitfall surrounds gifting assets too early without proper consideration of the giver’s own financial needs. While gifting can reduce IHT liabilities, Dyall cautioned that individuals must ensure their own future financial security is not compromised. Additionally, some gifts may precipitate other taxes, including capital gains tax on sold investments or income tax related to pension withdrawals.

A misconception about transferring property ownership to children also contributes to costly mistakes. Many wrongly believe that placing the family home in children’s names while continuing to live there eliminates the property from their taxable estate. However, this strategy does not remove the home from the estate for IHT purposes, and the full value may still be subject to the 40% tax on death. Furthermore, the children may incur capital gains tax on the property's appreciation since the transfer. Parents who choose this path must either pay their children a market rent, which is taxable income for them, or vacate the residence entirely to avoid these issues.

Dyall also highlighted the tax advantages of marriage or civil partnerships in the context of IHT. Married couples and civil partners benefit from a combined tax allowance permitting them to pass on assets valued up to £1 million without incurring IHT. By contrast, unmarried couples are limited to the standard single person's nil-rate band of £325,000. Consequently, failing to formalize a relationship through marriage or civil partnership can represent a substantial tax disadvantage.

Lastly, Dyall addressed the growing use of whole-of-life insurance policies designed to cover future IHT liabilities and prevent the forced sale of assets such as family homes. He advised that such policies should be placed in trust to ensure the payouts do not increase the taxable estate. For married couples, a joint life, second death policy is typically the most appropriate option.

As families face more stringent IHT exposure due to policy changes and rising property values, professional estate planning has become increasingly crucial to avoid costly errors and preserve wealth for future generations.