Estate Planning In The UK: Five Mistakes To Avoid

For married couples and civil partners, the rules around IHT provide significant advantages - but only if they are used properly. Transfers between spouses and civil partners are entirely exempt from IHT, meaning that on the first death, the entire estate can pass to a surviving partner tax-free.

Critically, any unused nil-rate band from the first death can be transferred to the survivor, potentially doubling their threshold to £650,000 - or up to £1 million when the residence nil-rate band is included. Yet couples often fail to plan in a way that makes full use of this transferable allowance.

Equally, many couples default to leaving everything to each other without considering the longer-term picture. While the spousal exemption provides immediate relief, it can simply defer a larger IHT liability to the second death, by which time fewer planning options may remain.

Couples should plan together, considering the combined estate as a whole. This includes reviewing how assets are held (jointly or separately), whether wills are aligned and up to date, and what strategies can be put in place during both lifetimes to reduce the eventual liability. Waiting until one partner has died leaves fewer tools available.

One of the most straightforward ways to reduce a future IHT liability is also one of the most underused: making gifts during your lifetime. Each individual has a range of gifting allowances that, used consistently over time, can make a meaningful difference to the size of a taxable estate.

These include:

·       An annual exemption of £3,000 per person, which can be carried forward one year if unused

·       Small gift exemptions of up to £250 per recipient per year

·       Wedding and civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else

·       Regular gifts out of surplus income, which - if structured correctly - are immediately exempt from IHT regardless of their size

·       Larger one-off gifts, known as potentially exempt transfers, which become fully exempt if the donor survives seven years

Many people are also choosing to use pension withdrawals to help younger family members directly - contributing towards university fees, repaying student debt or helping with a first home deposit. This approach reduces the taxable estate while allowing you to see the benefit of your generosity during your lifetime.

Despite the availability of these allowances, many people simply do not use them - either through a lack of awareness or a reluctance to reduce their own financial security. Careful cash-flow planning can help establish how much can safely be gifted without compromising retirement income.

Making gifts is a sound strategy - but only if those gifts are genuine. HMRC has strict rules around what are known as gifts with reservation of benefit: situations where assets are technically given away but the donor continues to benefit from them.

The most common example is the family home. Some people attempt to reduce the value of their estate by transferring their property to their children while continuing to live in it rent-free. In most cases, this does not work. Where the donor continues to occupy or benefit from a gifted asset, HMRC treats it as though the gift was never made - it remains in the estate for IHT purposes.

Similar issues can arise with gifts of investment assets where the original owner continues to receive income, or with arrangements designed to look like gifts but which involve the donor retaining some form of control.

The consequences of getting this wrong can be significant: not only does the asset remain taxable, but the arrangement may also give rise to income tax charges. For a gift to be effective, it must be unconditional, and the donor must genuinely give up all benefit. If you are considering any form of gifting strategy involving assets you currently use or benefit from, taking professional advice before proceeding is essential.

Trusts can be one of the most powerful tools in estate planning, yet they are frequently misunderstood or overlooked entirely. Used properly, trusts can help control how and when assets pass to beneficiaries, protect wealth from challenges such as divorce or creditor claims, and, in certain circumstances, reduce the IHT liability on an estate.

Common applications include discretionary trusts, which allow trustees to distribute assets flexibly among a class of beneficiaries, bare trusts for minor children and loan trusts or discounted gift trusts, which allow individuals to access a future income stream while removing the bulk of an asset’s value from their estate.

Life insurance policies, too, can be written in trust as standard. Without this simple step, a life insurance payout will form part of the deceased’s estate and may be subject to IHT at 40% - the opposite of what most people intend. Placing a policy in trust ensures the proceeds pass directly to beneficiaries outside the estate, quickly and without incurring an unnecessary tax charge.

The rules governing trusts are complex, and the wrong structure can create unintended tax consequences. This is not an area where it pays to proceed without professional guidance. A qualified financial adviser can help identify which trust structures are suitable for your circumstances and ensure they are established correctly.