Inheritance Tax (IHT) is a complicated area of law and often generates confusion and misconceptions. With generations living longer, assets increasing in value and inheritance tax allowances now frozen until 2031, IHT is becoming more and more common for many house-holds, and it is crucial to understand the rules.
People often say ‘I’ve given my assets away, they won’t be taxed on my death’. Th is may or may not be correct, depending on timings and also values. Gifts made within seven years of your death will still form part of your estate for IHT purposes.
These gifts are known as Potentially Exempt Transfers (PET), meaning gifts made are potentially exempt from inheritance tax depending on the timing of the gift. For example, if you survive seven years after the gift has been made then it becomes exempt from IHT, but if you die within that seven-year period, then the gift is included in the overall value of your estate for IHT purposes on death.
The overall position depends on the value of your assets gifted combined with those at date of death.
Property
‘If I gift my property away then it won’t be taxed’ – many people think that by gifting their home to their children or into trust then it won’t be subject to IHT on their death.
This is incorrect. If you gift a property and remain living in that property, then it is classed for IHT purposes as a Gift with Reservation of Benefit and means the value of the property still forms part of your estate for IHT purposes on your death.
Trusts
‘If I put my assets into a trust, they’ll be exempt from IHT’ – trusts can be a useful IHT planning tool as well as useful for succession planning however there is no guarantee that those assets are completely safe from IHT.
Depending on the type and value of a trust, some may still be subject to IHT during their lifetime and/or when trusts are wound up and assets given to beneficiaries. Trusts are a very complicated area of law and it is important to seek the relevant legal advice to ensure you fully understand the nature, consequences and tax position.
Wills
‘I’ve put in place a will, that’s sufficient for IHT planning’ – putting a will in place is the one of the basics and the cornerstone of IHT planning, but a will alone is not sufficient. There are various strategies that coincide alongside a will, such as trusts and lifetime giving which can enhance your IHT planning.
Tax planning can be complicated, with different rules for gifting and trusts, combined with multiple thresholds and different allowances depending on your circumstances, but debunking IHT myths is a great start to undertake some effective IHT planning. Done correctly it can save your estates paying more IHT than needed and ultimately passing more money to your beneficiaries.
For more information about IHT planning, contact Hannah Cole at DFA Law on 01604 609560 or visit the DFA Law website.
Associate Solicitor
DFA Law
