Inheritance Tax Myths

In this article we discuss some common misconceptions about Inheritance Tax:

1. Inheritance Tax Only Affects the Extremely Wealthy

Many people believe that Inheritance Tax is only something which the super rich need to worry about, but this isn't actually correct.

Current laws give everyone a £325,000 personal allowance before Inheritance Tax becomes payable, and there is a further allowance of £175,000 in relation to any property which passes to your children or grandchildren.

When you are married or a civil partnership, these allowances can be transferred between spouses, however non married couples do not benefit from this transfer.

These allowances may sound like huge amounts of money but taking into account the ever increasing property prices, a personal allowance can easily be used up.

From April 2027, any unused pensions and death-in-service benefits will also be included when calculating a person’s overall taxable estate. This change is estimated to make an additional 10,500 estates liable for Inheritance Tax, as well as increasing the tax liability of an estimated 38,500 already taxable estates.

2. Gifts Immediately Fall Out of Your Estate

Lifetime gifts are what are known as 'Potentially Exempt Transfers'. It takes seven years from the date of a gift for it to fall out of consideration of your estate.

If you pass away before the seven years are up, the following rules will apply:

- Any gifts which are less than three years old will be taxed at the full Inheritance Tax rate which currently stands at 40%.
- Gifts over three years old are subject to taper relief and will be taxed at a lower rate:

• 3-4 years 32%
• 4-5 years 24%
• 5-6 years 12%
• 6-7 years 8%

3. Giving My Property to my Children Will Avoid Tax

This is probably the biggest misconception people have. Many people believe that transferring the ownership of their property to their children whilst continuing to live there is a clever way to avoid Inheritance Tax, but this is not the case.

Although on paper the property may say it belongs to someone else, if you are continuing to stay in that property this is known as a 'gift with reservation of benefit' and it will still be included as part of your estate.

The seven year rule does not apply in these circumstances and the clock would only start ticking when you are no longer receiving benefit from the property.

Does this mean that you cannot give away property?

If you want the property to be excluded from your personal estate, the key to a successful gift is for you to not retain benefit. If you pay a full market rent then after seven years the property will fall out of consideration.

Understandably, for many people, paying a full market rent to their child after years of mortgage paying is quite an unappealing concept!

4. Non UK Assets are Exempt from IHT

If you are resident in the UK, your worldwide assets will be included in your estate for Inheritance Tax purposes.

5. £3,000 is the Most I can Give Away Tax Free

Whilst it is true that everyone has an annual allowance of £3,000, there are other allowances which can be used:

Small Gift Exemptions: Giftsof £250 can be used, although these cannot be used against the same person who has benefited from your £3,000 allowance.

Wedding Gifts: There are generous wedding/civil partnership gift allowances which can be made and are exempt from Inheritance Tax. You may give up to:
• £5,000 to a child
• £2,500 to a grandchild
• £1,000 to anyone else

Gifts out of Income: You can make potentially unlimited gifts as long as you can provide that that gifts come out of your monthly income and NOT your savings and that you can afford the gifts after paying for your living costs.

How can Jordans Solicitors help?

It is always best to seek professional advice before making undertaking any Inheritance Tax planning measures.

Our team can advise on the best ways to put into place the necessary legal structure in order to protect your family assets when considering Inheritance Tax planning.