Myth 1: I can avoid inheritance tax by giving all my money away 

If only it was that simple – no-one would ever pay inheritance tax, would they? In fact, if you make a gift to somebody, whilst there may not be an immediate tax charge, if you die within seven years inheritance tax may still be payable on that gift, depending how much it was. 


If you give away more than £325,000 pounds in the seven years before your death then anybody who has received a gift from you may have to pay tax on it. If tax is due, gifts made within the three years before your death are taxed at the full rate of 40%. 


Gifts given three to seven years before you die are taxed based on a principle known as taper relief. Here, the rate of tax reduces by eight percent for every year. If you die within three to four years, the tax rate is 32%, within four to five years it’s 24% and so on, until you get to seven years when the gift falls out of your estate. 

Myth 2: If I transfer my home to my children’s names and live for 7 years I will save inheritance tax 

This is something I’ve been in discussions about with some clients this week. Unfortunately it isn’t necessarily the case. With inheritance tax there is a rule called ‘a gift with reservation of benefit’.


It means if you make a gift of property, even if there’s no money changing hands it is still considered a gift at the market value of the property. If you’re still living in that property you are still retaining a benefit – so it will still be included in your own estate for inheritance tax. 


The only way to avoid that ‘gift with reservation of benefit’ is to pay rent at market value to your child. Then it won’t be considered a gift of reservation… but this is a very complex area. Don’t transfer your home to your children’s names without proper advice. 


There are other further implications as well. Even if you do survive for those seven years and it falls out of the gift of reservation of benefit rules, there are other possibilities. For example, if your child goes through a divorce or they’re made bankrupt, your home could be vulnerable.


Myth 3: If I put my house in trust I won’t have to pay inheritance tax or pay care fees.

This is another popular one. Again, it’s a very complex area. In terms of care fees, you cannot deliberately avoid care fees by giving away your property or putting a house in trust. 

This is known as deprivation of assets and local authorities are very hot on this sort of thing. 


In terms of putting your home in trust there are long-term implications. Trusts are subject to their own tax regime and usually fall under what’s called the Relevant Property Regime. This means that if the property is worth more than the nil rate band of £325,000 there is an immediate tax charge of 20% when you transfer the property into a trust. 


There are also ten-yearly charges – the rate varies, but generally it’s up to a maximum of six percent. There are further charges when the trust ends or part of the capital passes outside of the trust. As we mentioned before it’s considered a gift, so it’s subject to the seven-year survivorship rule. So if you die within seven years of transferring the property into trust then the full 40% may apply. 


Similarly, the gift of reservation of benefit applies if you’re still living in the property, so this really does require professional advice.

Myth 4: I can only give away £3,000 pounds a year without having to pay inheritance tax.

The £3,000 limit per year is known as the annual exemption. You’re allowed to give away as much as you like, but only £3,000 will be covered by the annual exemption, which means inheritance tax will not apply. 


You can carry this exemption forward for one tax year as well – so if you don’t use the exemption in one tax year you double your limit the following year, up to £6,000. You can give whatever you like, but you should consider the tax free allowance. 


If you’re giving away more than £325,000 in the seven years before your death, then inheritance tax may be due. There are some other exemptions as well such as the small gift exemption where you can give gifts of £250 or less.  You can make larger gifts for people who are getting married. There’s another exemption called regular gifts or payments that form part of your normal expenditure. You can discuss all these options with an estate planner for more guidance.

Myth 5: I don’t need a will as my partner will inherit everything free of inheritance tax.

Yes, this is what everyone thinks. We’ve mentioned this in a couple of other podcasts and articles:  under the rules of intestacy, married couples and civil partners who die without having children will receive the entire estate of their spouse or civil partner and, yes, it will be free of tax. 


But if you have children, then the spouse or civil partner will only inherit the first £270,000 and any personal possessions. The remainder is split 50% to the spouse and 50% to the children. It doesn’t all go to the surviving spouse. 


This only applies if people are married or in a civil partnership. In other relationships you will not inherit under the rules of intestacy and you will not qualify for the spousal exemption, so inheritance tax may be due.

Myth 6: I can pass on £1 million free of tax.

This is where it gets a little bit complicated. Potentially you can leave up to £1 million free of tax. Any individual, regardless of their circumstances, is entitled to a tax free allowance of £325,000. This is known as the nil rate band. Anything above that is generally taxed at a rate of 40%. 


However, if you are married or in a civil partnership, anything you leave to your spouse or civil partner is free from inheritance tax regardless of the value. The recipient spouse needs to be ‘UK domicile’ which is another complex area. 


The spousal exemption on any unused allowance from the first partner can subsequently be transferred to the surviving partner’s estate. That effectively doubles up the tax allowance for married couples and civil partners to £650,000. 


As well as the nil rate band, there is an additional allowance introduced in 2017, known as the Residence Nil Rate Band which can provide an additional tax-free allowance of up to £175,000. 


However, unlike the nil rate band there are certain qualifying criteria. In general terms, the Residence Nil Rate Band is available if all of the following criteria is satisfied: 

  • you own a share in a property that you’ve used as your residence during your ownership
  • your interest in the property must be left on death to direct descendants (including stepchildren) 
  • the value of your estate must be below £2 million 


Provided those three criteria are satisfied,  the estate can claim up to a maximum of £175,000. This allowance is also transferable between spouses and civil partners. It basically means that married couples and civil partners can potentially claim up to £1 million tax-free via a combination of two nil rate bands and two Residence Nil Rate Bands. 


But, because of the qualifying criteria, not everybody is entitled to that. If you’re not married, if you don’t have children, if you don’t own a property or if your estate is above £2 million,  you won’t be able to get the full £1 million. It depends on your circumstances at the date of your death – so it’s not as straightforward as having a million pounds tax free.

Myth 7: Assets abroad aren’t counted for UK inheritance tax.

This is where the term that I mentioned previously comes into play: UK domicile. This is a complex area of law again. Essentially, if your permanent home is abroad, inheritance tax is generally only paid on your UK assets. 


However, if you are treated as being domiciled in the UK, then your worldwide estate is subject to inheritance tax. HMRC will treat you as being domiciled in the UK if you have either lived in the UK for 15 of the 20 years before your death, or if you’ve had your permanent home in the UK at any time in the last three years of your life. If either of those apply, you will be liable for inheritance tax on your worldwide assets; not just the assets located in England. 


Your executor may be able to reclaim tax, because in some countries there is a double taxation treaty. If an asset is located abroad and you’re having to pay tax in that country and you’re also liable to UK inheritance tax, then your executor may be able to reclaim some of the tax, but it depends on the country where the asset is located and what the rules are. 


Again, you should seek specific professional advice if your permanent home is in the UK and you have assets overseas.

Myth 8: I won’t have to pay inheritance tax if I move abroad.

Similarly, the domicile rules also apply in this scenario. As I mentioned above HMRC will deem you UK domicile and subject to inheritance tax on your worldwide assets if you lived in the UK for 15 out of the last 20 years or you had your permanent home here in the last three years of your life. 


You might not be living in the UK at the date of your death. But if you qualify for any of those criteria, potentially you will still have to pay inheritance tax on your worldwide assets. Essentially, it means that moving abroad doesn’t dissolve your liability to inheritance tax.

Myth 9: Inheritance tax planning only involves trusts, which is too complicated

That’s not necessarily the case. There are so many options when it comes to inheritance tax planning. Some of those may involve the use of trusts, but they don’t have to be complicated. They can be fairly straightforward. 


There are other options as well – there are lots of available exemptions and reliefs. Planning can either take place within your will or during your lifetime where we can utilise gifting options. Ultimately that’s where professionals like us come into play. We assess your estate and your inheritance tax liability to find the best solutions that suit you and your requirements. 


Sometimes that may also involve other professionals such as financial advisors and will writers, because there can be a crossover between lifetime planning and will planning. But it doesn’t have to be complicated. It can be fairly straightforward to find a solution that suits you.

Myth 10: my life insurance policy will pay out to my beneficiaries free of inheritance tax

That’s not always the case, and is not commonly known. Quite often when you’re arranging a life insurance policy, you will be asked whether you want to put your policy in trust. A lot of people don’t really know what that actually means. 


When you write a life insurance policy in trust it means the proceeds of that policy goes directly to your beneficiaries and not to your legal estate. So it’s not going to be subject to inheritance tax.  If the policy isn’t in trust then the proceeds may form part of the estate and could be included for assessment for inheritance tax. 


If you’re ever going through the process of arranging life insurance and your advisor or the online forms mention trusts, go for that option. As it’s outside your estate the policy will pay out more quickly and not be subject to inheritance tax.

For further information on inheritance tax

When it comes to tax, there are lots of rules, lots of exemptions and lots of reliefs. So the best thing is to seek advice from a professional – we can provide you with the information that’s relevant to your particular scenario. We can give you an assessment of your particular circumstances and how inheritance tax planning could help.

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