Inheritance Tax Q&A: Addressing Common Misconceptions

Demystifying Inheritance Tax Misconceptions

Inheritance Tax (IHT) is one of the most complex and misunderstood areas of wealth management. As the proposed 2027 rule changes bring most unused pensions into the taxable estate, many families are realising that their long-held assumptions about wealth taxation no longer apply.

In this article, we answer some of the most common IHT questions and misconceptions, helping you understand how the rules really work, what’s changing, and how you can take action to protect your estate.

Q1: My pension isn’t part of my estate…will it be taxed?

Under current rules, most defined contribution (DC) pensions fall outside your taxable estate for IHT purposes. However, from 6 April 2027, that’s set to change.

Unused DC pensions will now be included within the estate if left untouched at death, potentially pushing estates above the IHT threshold and leading to a 40% charge.

We recommend individuals to review their pension structure and death benefit nominations. Professional advice can help determine whether drawing from, restructuring, or placing benefits in trust could reduce exposure.

Q2: I’m below the £325,000 threshold. Do I need to worry about IHT?

Many people assume that if their estate is worth less than the £325,000 nil-rate band (NRB), they’re in the clear. However, when you factor in property values, pension savings, and life insurance policies, it’s easy to exceed this limit.

When one spouse or civil partner dies, any unused portion of their nil rate band can be transferred to the survivor’s estate. This allows the surviving partner to benefit from a potential inheritance tax threshold of up to £650,000. The residence nil rate band (RNRB) can also provide additional relief when a home is passed on to family members.

It is important to regularly review your estate value, including pensions, and take early steps to manage potential growth. Trusts, gifting, and insurance can all help offset future liabilities.

Q3: If I make gifts now, they’re automatically free from Inheritance Tax.

No, this is not immediately true.

While annual gifts of up to £3,000 (and small gifts under £250 per person) are exempt, larger gifts are only fully exempt if you survive seven years from the date of the gift.

This is known as the “7-Year Rule.” If you pass away within that period, a tapering IHT rate applies.

Structured gifting, supported by professional planning, can help you pass on wealth tax-efficiently over time, reducing exposure while maintaining flexibility.

Q4: How does Life insurance help with IHT?

Life insurance can be one of the most effective ways to manage liquidity and protect your estate when used alongside other tax-based strategies.

While life insurance doesn’t reduce your IHT liability, a policy written into trust provides tax-free funds at death to cover the tax bill. This means your beneficiaries don’t need to sell assets to pay the tax bill.

As such, it is beneficial to explore insurance as part of a wider estate plan. Our partners at Sphere Assured specialise in bespoke life insurance solutions tailored to IHT mitigation.

Q5: I can just deal with IHT later?

This is one of the most common and costly inheritance tax misconceptions.

You can maximise the benefits of IHT planning by starting early. Strategies like gifting and setting up trusts take time to establish, so beginning sooner helps you realise their full advantages.

It’s importance to seek a qualified tax professional to assess your exposure, model potential liabilities, and put in place a plan that evolves with your circumstances.

Take Control of Your IHT Position

Many estates fall into unnecessary IHT exposure simply due to misunderstanding the rules or assuming existing exemptions will apply. With the confirmed changes taking effect from April 2027, misconceptions around pensions, trusts, and exemptions could lead to costly mistakes if left unaddressed.

The good news is that you can reduce much of this risk with the right tax advice and forward planning. By understanding how your pension is taxed, using trusts or life insurance strategically, and making gifts to lower your tax exposure, you can unlock more options. The earlier you start, the better your results.

At WTT Group, our tax specialists work closely with clients to review their wealth, ensuring that estate plans are both tax-efficient and aligned with personal goals. To discuss your estate planning needs, book a free 20-minute consultation with one of our advisors to see how trusts and other mitigation strategies could work for you.

Join Our IHT Webinar

We’re here to help you understand your IHT exposure and demystify inheritance tax misconceptions. Join us for a free webinar where we explain how the new inheritance tax rules could affect your pension along with tips on how to prepare.