Inheritance Tax Myths and Misconceptions

Inheritance Tax Myths and Misconceptions

The UK’s Inheritance Tax (“IHT”) is an often difficult to navigate minefield littered with misconceptions and misunderstandings.

Here are 10 myths about IHT which I shall seek to debunk:

1. IHT is a big earner for the government

IHT is disliked widely in the UK. It had receipts of £5.2 billion in 2018 but accounts for less than 1% of the government’s taxes overall

2. All married couples have a £1M allowance against IHT

This is not quite the case. All individuals have a £325K allowance against IHT and if the first deceased of a married couple leaves their assets to the surviving spouse, the survivor will have an aggregated nil rate band of £650K. Add to this the residence nil rate band (if the family home is being left to children/grandchildren) and the total allowance increases to £900K currently. As of April 2020, the overall allowance will be £1M.

3. The residence nil rate band only applies to gifts to blood related children or grandchildren

The government in introducing the nil rate band specified that it would only apply to those leaving their home to direct descendants. Whilst this is true, step children/grandchildren are included within this definition as well (as are their spouses).

4. It is not possible to give away more than £3K per tax year from capital without facing an immediate tax bill

Not correct. All individuals are free to give as much money as they wish to people such as family members. There is no immediate charge to charge to IHT. It is only if you die within 7 years of the gift that there can be any IHT consequences.

5. Taper relief applies on all lifetime gifts after 3 years

Again, not correct. If you give an amount away and then die within 7 years, the sliding scale of taper relief which potentially reduces the level of tax down from 40% that might be payable on that gift only applies on amounts given away in excess of £325,000. Therefore if you make gifts during the last 7 years of your life which total less than £325K, there will be no taper relief available on death.

6. Giving away your home to your children will save IHT if you survive for 7 years

If you give your home to your children but carry on living there, the Revenue call deem this to be a Gift with Reservation in that although you have transferred the assets, you have not actually given up your use of it. As such, your estate would be treated as though the asset was still in your estate on death. In such circumstances your children could actually be worse off if this is done as the property might rise in value and then be subject to Capital Gains Tax when they sell it.

7. Assets abroad are not counted for UK IHT

This is not right. If you live in the UK and are domiciled here your entire estate worldwide will potentially be taxable on your death regardless of where it is situated.

8. It is not possible to give excess income away which is adding to an IHT problem

It is perfectly possible to give away surplus income you might receive which is adding to capital reserves. The Revenue will not treat this as impacting on your nil rate band allowance. HMRC prefer to see regular patterns of income being given away and after your death it would be the responsibility of your executors to demonstrate that you could afford to give away the excess income without suffering in terms of your lifestyle.

9. My spouse/partner will receive everything I own free of IHT

The common assumption is that if someone is married or in a civil partnership, their entire estate will pass to their surviving spouse or partner on their death free of IHT. If you do not have a Will this will not necessarily happen. If you are married, have an estate in excess of £250,000 and have children, then your children will share in part of your estate. The larger the amount they receive, the more chance there is of IHT being charged.

10. I can give half of my home way to my adult child who has not yet flown the nest and be guaranteed to save IHT

This is partly true in that if the child takes on an equal share of the outgoings then this would not be a Gift with Reservation. However, as soon as that child moves out, the gift does become a Gift with Reservation and your estate will be taxed as though you own the share given away.

If you would like to discuss any of the above issues then please feel free to contact us on 01245 504904 to book an appointment to discuss these in more detail. More information on these issues and IHT generally can also be found in our Guide to Inheritance Tax Planning and Solutions.

Clive is the head of our Private Client Team. He provides expert advice on probate, wills and Inheritance Tax matters, employing the use of Wills and trusts where necessary to achieve the most favourable outcome for clients.