At 40%, the rate of Inheritance Tax (IHT) is one of the highest tax rates in the UK.  It is also payable on ‘taxed money’, so most people are keen to avoid it if at all possible. Understanding Inheritance tax and how you may be affected by it, is vital. If you begin planning for it now, you avoid passing a tax bill onto your loved ones when you’ve passed.

In this article we will cover some of the most common misconceptions about IHT that we hear and what the truth is.

IHT is just a death tax – this is not true

IHT is also potentially payable in other situations such as when you gift money or assets into trust or make certain transfers to a limited company.  Any significant gift or transfer at an undervalue potentially has IHT implications, whatever age you are; so it’s a good idea to stop and ask for advice before doing this.

I don’t need to worry about IHT until I’m in my 70s – this is not the case

Depending on the IHT planning strategies adopted you might be faced with a 7 year wait or even longer before you can be sure of avoiding an IHT liability on your estate.  The earlier you seek advice the better; we recommend you don’t leave it any longer than your mid-50s.

I can give my house to my family or a trust to take it out of my estate and carry on living in it – not true

Unless you pay a market rent to the new owner, for as long as you live in the house and therefore benefit from it (and in fact for 7 years after you vacate it or start to pay a market rent) this remains in your estate for IHT purposes.  The best IHT planning strategies start with your other assets.

If I give money away to family, this stays in my estate for 7 years, but reduces in value gradually over that period – not quite

Unless covered by one or more of the gifting exemptions, the money remains in your estate for 7 years for IHT purposes but doesn’t reduce in value.  Taper relief provides for a reduction in the IHT liability if that gift becomes subject to IHT on death – but in practice this will only arise if total non-exempt gifts to family in the 7 years before your death exceed your nil rate band (plus any transferable nil rate band that you are eligible for).  Otherwise, the gifts just use up some of your nil rate band(s) and therefore increase the amount of other assets that are subject to IHT – at the full 40% rate.

As a married couple, our personal assets are less than £1 million so with the new Residence Nil Rate Band we won’t be exposed to IHT – not necessarily

The Residence Nil Rate Band (RNRB) is a complex provision subject to a number of conditions that must be met, and you might not even be entitled to the full RNRB if your total estate including any business assets are above £2m.  Planning is recommended to ensure the RNRB is fully available.

As a married couple, if one of us passes away the surviving spouse automatically gets the benefit of the unused nil rate band and Residence Nil Rate Band – no

The transferable nil rate bands have to be claimed on the correct IHT forms, within the correct timescales – if they aren’t claimed the surviving spouse’s estate isn’t entitled to them which can have disastrous IHT consequences. Conditions must be met for the residence nil rate band(s) to be available.

I am leaving all of my estate to my family, therefore there won’t be any IHT to pay

This is actually only true in part. If married couples or those in a civil partnership leave their estate to each other, there’ll be no inheritance tax on those assets on first death. Why? Because there’s a specific IHT relief for assets passing between spouses/civil partners.

However, where an individual’s estate exceeds £500,000 being the nil rate band of £325,000 and the residence nil rate band of £175,000 plus transferable nil rate band and residence nil rate band if available, and those assets are left to other family members or friends, then inheritance tax will be payable at 40%. The residence NRB is only available where a qualifying property is passing to direct descendants on death. In most cases the RNRB wouldn’t be used on first death, so if the estate passing to beneficiaries other than the spouse on first death was above £325k, there would usually be IHT to pay.

I won’t have any inheritance tax to pay on my property overseas

For UK domiciled individuals, IHT is payable on worldwide assets.

You may even have tax to pay in the country in which the property is situated. Therefore, it is essential to ensure you take legal advice in the country where your overseas assets are located.

Some overseas properties are owned in a company to ensure they will pass to the beneficiaries you wish, and in many cases to reduce any potential overseas tax. Even so, they are still taxable in the UK. In addition, a foreign Will is often required to ensure your assets pass as you intend.

My joint estate is less than £1m, therefore I won’t have any inheritance tax to pay

This misconception is usually based on the budget announcement in 2015 which stated that a married couple and civil partners will be eligible to a new residence nil rate band, which when added to the existing nil rate band of £325k will give them £500k each, i.e. £1m between them.

However, the intricacies of the new legislation mean that in certain circumstances the full £1m may not be available, for example:

• The residence nil rate band only applies where a property is left to one or more lineal descendants –this includes children, stepchildren, adopted children, grandchildren. If left to a sibling there will not be any residence nil rate band to use and those with no direct descendants will not be able to benefit.
• If the value of the residence is less than the Residence Nil Rate Band (RNRB) then the relief is restricted to the value of the property (specific provisions apply where a person has downsized or disposed of their property after 7 July 2015)

To understand the full circumstances and how they might apply to your situation, we recommend having a chat with us personally.

I have given away assets so I won’t have to pay IHT on them

Provided you survive 7 years after making a gift then the value of the asset will fall outside of your estate.

However, you need to be very careful where gifts are made which you continue to benefit from. These are known as Gifts with Reservation of Benefit (GROBs) and will continue to form part of your estate. An example may be a property gifted to a child where you continue to occupy it. However, with planning before making the gift it may be possible to either eliminate or reduce this charge.

Talk to us

There are many considerations to take into account when it comes to Inheritance Tax planning. It is, therefore, important to speak to a specialist financial planner to get independent advice on what strategies will work best for you and your family.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority. The Financial Conduct Authority do not regulate, tax planning, estate planning or trusts.