Debunking 7 common Inheritance Tax myths

Inheritance Tax (IHT) is a complex area of tax law in the UK and is a subject that often generates confusion and misconceptions for individuals when considering their future tax plans, this misunderstanding can lead to poor financial planning which can have serve, unintended consequences for your estate. In this blog, we’ll debunk some of the most common myths and misconceptions about Inheritance Tax in the UK.

Inheritance tax is only for the wealthy

While it’s true that Inheritance Tax often affects those with larger estates, it’s not exclusive to the wealthy. The threshold for Inheritance Tax, known as the nil-rate band, applies to everyone. Currently, the nil-rate band for the 2023/24 tax year stands at £325,000. If your estate’s overall value exceeds this threshold, IHT may apply. This means that individuals with relatively modest assets, such as a home and some savings, could be subject to IHT.

“I’ve given my assets away, so they won’t be taxed.”

Many people believe that they can avoid Inheritance Tax by simply giving away their assets throughout their lifetime. However, gifts made within seven years of your death are subject to Inheritance Tax under the seven-year rule. These gifts are known as potentially exempt transfers (PETs). To put simply, if you survive for seven years after making a gift, it becomes exempt from IHT, but if you die within seven years of making a gift, the gift is included in the overall value of your estate for tax purposes.

“My spouse or civil partner is exempt from paying inheritance tax.”

While it’s true that gifts between spouses and civil partners are generally exempt from IHT charge, this exemption only applies to individuals who are both domiciled in the UK. If one of you is not domiciled in the UK, there may be limitations to the exemption. Additionally, the surviving spouse or civil partner may inherit the deceased’s nil-rate band and any unused residence nil-rate band, potentially allowing for a larger tax-free threshold.

“I’ve put my assets in trust, so they’re safe from any IHT charge.”

Placing assets in trust can be a useful estate planning strategy, however, it doesn’t guarantee that those assets are completely safe from Inheritance Tax. Different types of trusts have different tax implications, and some may still be subject to IHT charges during the lifetime of the trust or when assets are distributed to beneficiaries. It is important to seek professional advice when setting up a trust to fully understand their tax implications.

“I don’t need to make a will because I don’t have much to leave.”

Regardless of the size of your estate, having a valid will is essential. A will allows you to engage in effective estate planning which could potentially reducing the impact of IHT on your estate. Even if you think you don’t have much to leave, a will can ensure that your assets are distributed as you intend.

“My home is my biggest asset, so my family will have to sell it to settle any IHT bill.”

It’s a common fear that the family home will have to be sold in order to pay off any Inheritance Tax bills. However, the residence nil-rate band (RNRB) is an allowance which can be applied in circumstances where a residence is passed to direct descendants, such as children or grandchildren. For the 2023/24 tax year, the residence nil-rate band allowance is £175,000. When combined with the standard nil-rate band of £325,000, it could potentially result in an overall tax-free threshold of up to £500,000.

“There is nothing I can do to reduce my IHT charge.”

While you can’t eliminate Inheritance Tax entirely, there are ways to help minimise its impact on your estate. Effective estate planning strategies include:

• 1) Making use of the nil-rate band and residence nil-rate band (RNRB).
• 2) Gifting assets that fall outside the seven-year rule.
• 3) Setting up a trust.
• 4) Using tax-efficient investment vehicles.
• 5) Seeking professional advice for future planning can help to mitigate any tax charges as effectively and compliantly as possible.

What else can I do? Explore this recent blog from Money Street which outlines some handy tips on how to reduce IHT here.

Planning for the future

Understanding Inheritance Tax and how the law works in the UK is crucial for effective estate planning. Relying on common misconceptions can lead to costly mistakes. It is vital to seek professional advice and stay informed about current tax laws to ensure that your assets are managed according to your wishes and with minimal tax liability.

We can help

We understand that everyone has different circumstances and needs. By taking a co-ordinated approach to all areas of life events, we ensure your wealth is passed on in the most effective way.

For more information on our IHT services, email us at info@wttconsulting.co.uk or call us on +44 (0)20 3468 0000 to find out how we can help you plan right.