5 Inheritance Tax Myths

To some, Inheritance Tax (IHT) is one of the most hated taxes in Britain. To others, it provides social fairness and wealth distribution. Some see IHT as a second tax on money earnt. Whereas others believe it is unearned wealth for future generations and doesn’t seem fair.


However, it is widely misunderstood and the subject of a number of myths. Here are the five biggest.

Inheritance Tax

Myth 1: Inheritance tax raises lots of money for the government
There are actually a number of ways to avoid IHT which raised only £4.9bn in the 2016-17 tax year, less than 0.9% of the £574.9bn total collected by HM Revenue & Customs. Currently fewer than 1 in 20 pay IHT and there have been arguments for and against a rise in the amount paid.


Myth 2: IHT only hits the super-rich
It is well documented that the super-rich like to protect their wealth through measures such as, setting up trusts or buying assets that qualify for business property relief. Increasingly, it is the middle classes who are beginning to be effected by IHT, which now account for around half of the IHT take.


This is due to a combination of rising house prices and an IHT nil-rate band that has been frozen at £325,000 since 2009. In January 2009 the average UK house price was £157,234, in January 2017 it had increased to £218,255. Whereas the average price in London has almost doubled since 2009.


Myth 3: I can pass on £1m free of tax
George Osborne’s move to raise the IHT allowance to £1 million will take several years to come into force and may not be as generous as it first seems. The chancellor announced a new transferable allowance worth £175,000 for parents who leave their main home to their children and grandchildren. That would effectively lift the IHT nil-rate band from £325,000 to £500,000 per parent, or £1m for married couple and civil partners.

5 Inheritance Tax mythsThis new transferable allowance is ‘the residence nil-rate band’ which was introduced last tax year (2017/18), worth £100,000. It increases by £25,000 for the following 3 years until it hits £175,000 in 2020/21. From that point it will rise in line with inflation. This additional allowance only applies to family homes, no other assets including second homes and buy-to-let properties. It is also gradually withdrawn for estates worth more than £2 million.


Myth 4: My partner will inherit everything free of IHT
Many people assume that if they are married or in a civil partnership, IHT will not be an issue for them. But they may be wrong, as the family of comedian Rik Mayall discovered a few years ago. Although the star of the Young Ones and Bottom was married, he hadn’t written a valid Will. The result was his estate was subject to the rules for intestacy, so that a portion automatically went to his children, thus triggering an IHT charge that could have been avoided had his entire estate been left to his wife.


The key point is that it is absolutely vital to make a Will. It is the only way you can exercise control over who gets what, and how much. This is particularly important for unmarried couples, especially those with children.


Myth 5: You can avoid IHT by giving all your money away
Of course, it isn’t as easy as that – you can’t simply give away all your wealth shortly before you die and escape IHT. HMRC wouldn’t allow it, and it wouldn’t take them long to work that out. You have to survive SEVEN years after giving the money away or making a gift. If you die within that 7 years it is known as a “potentially exempt transfer”, and may fall back into your estate and be liable for IHT if your estate’s value exceeds the nil-rate band when you die.


There are other ways of giving away money though:
•  Giving away or making gifts of up to £3,000 per year
•  Small gifts up to the value of £250 to as many individuals as you like per tax year
•  Wedding cash is free from IHT – the couples parents can gift up to £5,000 in cash each. Grandparents up to £2,500 each and others up to £1,000.
•  Your IHT rate will fall from 40% to 36% if you give away 10% or more of your estate to charity.


There are other options such as setting up Trusts, which, provided certain conditions are satisfied, means you no longer own the money and it may not be counted towards your Inheritance Tax bill. However you should explore those options through a professional and/or financial adviser as Trusts can be complicated and could mean you losing control and access to your money and assets long before your death.


If you have any queries or questions about Inheritance Tax, please leave a comment or contact us here.

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