We devote most of our lives to earning, saving, investing, and building-up a safe space in the world for our loved ones. Though we start out planning for our own futures – the work we will do, and the goals we will work towards – there comes a point where we are planning for a much bigger future, and securing it not just for ourselves, but for the family we create.

It’s no surprise, then, that so many of us become preoccupied with the question of inheritance tax. Our savings, property, and investments are the best things we have at our disposal to continue protecting and helping our loved ones when we are no longer here, and the idea that a substantial portion of that estate will be drained by the government is, to put it simply, frustrating.

As such, inheritance tax is a major point of friction for many people, but understanding how it works is the key to overcoming it as much as you can. It doesn’t impact everyone’s estate equally; how you have prepared your estate against a steep tax after you die will have a significant impact on how much is taken.

But inheritance tax is also a complex subject, and requires expert guidance if you want to feel sure you have done enough for your beneficiaries.

With that in mind, here are the most common inheritance tax mistakes we’ve seen over the years.

1. Putting it off

Inheritance tax will only have bearing on your estate once, and it’s very easy to see that as contained to the distant future – far too remote to be a pressing concern right now, or next year, or even ten years from now.

This is exactly the sort of thinking that causes so many people to defer writing a will – at times, until it is too late to do so. True, we’d all rather avoid the subject of our own death, particularly when it comes to dwelling on how our loved ones will cope without us, but tackling the question sooner rather than later is the best way to avoid sleepless nights and eleventh-hour regrets.

The sooner you can start to prepare your estate for the hungry bite of inheritance tax, the sooner you can put those worries for the distant future to the back of your mind, and simply enjoy each day as it comes.

With a few exceptions we’ll look at below, gifts made to loved ones more than 7 years before you die won’t be liable for inheritance tax – just one reason why waiting until the last-minute is not a good idea. What’s more, gifts up to a certain quantity and value are automatically exempt from inheritance tax, and, in order to take full advantage of this, you may want to start as soon as possible.

2. Assuming the threshold is too high to worry about

Not every estate is liable for inheritance tax – there is a limit in place, below which no inheritance tax will be claimed. So, for some people, no prior planning needs to be done (although it’s always a good idea to check this with an independent financial advisor, or risk some costly oversight).

The catch is that the threshold for inheritance tax has remained the same for many, many years – and, during those years, inflation and other key factors like property prices have risen substantially.

The threshold currently sits at £325,000. For an estate to fall below that threshold, it needs to be the case that the total value of any savings and investments, possessions and property totals less than £325,000.

These days, the average house price in England is around £316,000 – more than 12% higher than it was 12 months before the statistics were gathered. In some parts of the country – particularly in and around London, Cambridge, and Bristol – the average is substantially higher.

So, while inheritance tax has never impacted the whole population, the number of people at risk of being impacted by it each year is increasing. Our estates are growing in value, but the threshold remains the same.

3. Failing to write a will

One of the most common reasons why a person will die without a will stipulating who will inherit what from their estate is that they assume their wishes are too simple to warrant a legal document. As we mentioned above, it’s always tempting to put off thinking about the future, so it’s no surprise that so many people can talk themselves out of putting together a will.

The trouble is, without a will, an estate will be sorted according to the rules of intestacy – and that doesn’t often pan-out exactly as we might assume it will.

For instance, a lot of people assume that, without a will, their entire estate will simply pass onto their spouse. In part, this is true, but, if you have children, this is only up to the sum of £270,000. Your spouse will then only receive half the remainder of the estate after the initial £270,000. The other half will be split equally between the children, and that may mean they need to pay a level of inheritance tax that you hadn’t anticipated.

4. Simply passing ownership of your property onto someone else

This is a common misconception – that, to avoid the risk of tax being levied on your property’s value, the best solution is to gift ownership to someone – say, an adult son or daughter – on the agreement that you will continue to live there as normal until you die.

At a glance, it can seem like a good idea. After all, having no property makes your estate far less complicated, and means you’ll likely pass quite comfortably under the threshold – or, in the very least, that the highest value asset you have will pass below that threshold.

The trouble is, it’s not that simple. First of all, valuable gifts will only go untouched by inheritance tax if you continue to live for at least 7 years after making the gift. If you die sooner, then that gift will be taxed.

Secondly, if you continue to live in the house as normal, then the government may decide that this is a gift ‘with reservation of benefit’. In other words, they understand the intention behind the change in circumstances, and will consider it part of your estate anyway.

The rules are similar when it comes to gifting ownership of your house to a relative in order to avoid the costs of a care home. This is viewed as deliberate deprivation of assets, and is likely to result in ownership being reclaimed and used to fund the cost of care.

When it comes to inheritance tax, this situation can be mitigated if, after transferring ownership of the property to, say, a daughter, you pay rent to her that is reflective of market rates. Alternative, that daughter could buy your property from you but, again, this can’t just be for a nominal sum. If there’s a substantial difference between the home’s market value and the amount your loved one pays for it, then that difference will be calculated and liable for inheritance tax.

5. Assuming a trust is enough

Not all trusts are created equal. True, setting up a trust for a loved one is a wonderful way of ensuring they will have a financial ‘cushion’ in the future – maybe for something specific, like further education or getting on the property ladder, or simply for whatever comes their way – but trusts aren’t a magical forcefield against inheritance tax.

In general, money put into trusts is considered a chargeable lifetime transfer. If this is the case then, even after 7 years (at which point most gifts are considered to be exempt from inheritance tax) the trusts you create may well still be taxed. The rate will generally be lower than the ‘standard’ 40% (provided those 7 years have passed), but that’s still a significant leap from many people’s expectations of trusts.

Some trusts provide much greater protections against inheritance tax than others. There’s no ‘one size fits all’ solution, and by far the best course of action is to talk things through with a member of our team of independent advisors. If not, your expectations of your trusts may be misplaced.

6. Overlooking any life insurance policies

Many people aren’t aware of the fact that a life insurance pay-out will be added to the final total of your estate – a fact which means it may end up levied for inheritance tax. This sum is, of course, intended to represent the ultimate safeguard for your loved ones – a financial boost that will keep them from worrying about the household finances after you die.

We take on the (at times) high price of a strong life insurance policy because of the long-term financial benefit. But the high value of life insurance does not escape notice, and, unless you take the right precautions, it won’t help your loved ones as much as you expect it to.

Insurance and protection policies can be written into trusts but, again, you’ll want to work with your financial advisors to ensure that this has been done right, the first time around. There’s very little margin for error here, and a lifetime’s worth of peace at mind at stake.

Unfortunately, this is not common knowledge, and far too many families have been deprived of money that was intended to ease them through the months and years that follow the death of a loved one.

7. Not being open with your loved ones about your plans

Again, this is a difficult subject to address. Nobody wants to set aside a precious hour or so to go through the will together, ensure their beneficiaries know what the code to the safe is and what paperwork they will need to pull out of the filing cabinet in the days after their death. These aren’t easy conversations to have, but talking about death with loved ones is important.

The more open you can be now, the less the question of ‘the future’ has to sit like a weight on your shoulders – and the shoulders of those who depend on you.

8. Neglecting any businesses in which you are a majority shareholder

When we think about inheritance, we tend to focus on the more personal assets – the family home, for instance, along with any savings accounts and personal possessions we want to pass on to certain people.

But, along with the various taxes businesses have to contend with, inheritance tax is an important concern for business owners. At the standard rate of 40%, this tax can have a devastating impact on whoever inherits your stake in the business.

You can reduce the value of the business by either 50% or 100% through the government’s Business Relief scheme, but there are some exceptions. For instance, if you have owned your stake in the business for less than two years, or if the businesses assets far exceed what it needs for ‘identifiable future business’.

Again, this isn’t something you want to tackle on your own. Your advisor can walk you through the process of mitigating the impact inheritance tax will have on your business, and the person who inherits your stake in it.

9. Only relying on online guides

It’s a very, very good idea to read up on the specifics of inheritance tax, think about how it could impact your estate, and start thinking about what you can do to reduce the sting it gives to your loved ones, but it’s not the be-all-and-end-all.

Everyone’s estate is a little different, and no guide or book can address all those variables. The only way to be certain that your estate is in order, and that your plans for your loved ones can be realised, is to lean on the expertise of an independent and trusted financial advisor.

This is exactly what the team here at Perennial Wealth are able to do. We can answer all your questions, put in place a proactive countermeasure to inheritance tax, and ensure that, as your finances change over the years, everything is accounted for and nothing is left to chance.

Please note: Inheritance tax planning, will writing, estate planning and trusts are not regulated by the FCA