Dispelling the myths of IHT

From many years of working in this area of tax and financial planning, it has come to my attention that there are a number of myths or misunderstandings in relation to estate planning for Inheritance Tax (IHT) mitigation. I will try to dispel some of the most common ones below:

1. IHT is just a death tax – this is not true; for example, IHT may be payable in other instances where assets or money are gifted into trusts above the nil rate band, resulting in a Chargeable Lifetime Transfer (CLT)
2. IHT cannot be avoided – there are many and varied methods of IHT mitigation depending upon an individual’s circumstances; if none are appropriate one can always consider a life assurance policy as a solution to pay the potential tax due
3. All married couples have a £1m allowance against IHT – this is not quite the case as the amount of the residence nil rate band is restricted to the value of the property i.e. if it is valued at £250k then the overall combined nil rate bands will be £325k times two plus the £250k or £900k in total
4. I don’t need to worry about IHT until after I retire – again, not true. The earlier you plan for IHT, the better as many mitigation strategies can take 7 years or more to take effect. Or indeed you may, unfortunately, become liable much earlier than anticipated due to the size of your estate and early death
5. It is not possible to gift away more than £3,000 per year – not correct as anyone is free to gift away as much as they want to other people without an immediate tax charge and there is only a consequence if the donor dies within 7 years meaning the Potentially Exempt Transfer (PET) fails. Also, you can use the previous year’s £3k if you haven’t already done so and you can gift as much as you like from income as long as it is out of normal expenditure and it doesn’t affect your own standard of living
6. Giving away your home to your children will save IHT if you survive for 7 years – there are pros and cons to doing this (including in relation to long term care fees) but if you continue to live in your home without paying a market rent, then this will be deemed as a ‘Gift with Reservation of Benefit’ and remain inside your estate. Furthermore, they may be subsequently subject to Capital Gains Tax on selling it. Also, the ‘7-year rule’ for PETs does NOT apply to long term care fees assessment
7. Assets abroad do not form part of your taxable estate – if you live in the UK and are domiciled here, then your entire worldwide assets are potentially considered part of your estate
8. All savings form part of your taxable estate – one of the many advantages of pensions is that your personal pension is outside of your estate for IHT purposes; this is a further benefit to income tax relief and other tax advantages that pensions offer

I hope that this has been useful, even as a refresher. We adopt a variety of mitigation strategies for clients in the positon where their estates may be liable to IHT. If you or your clients are in this position, please do not hesitate to contact us below.

Important Note: The Financial Conduct Authority do not regulate Tax and Estate planning.

Share the article