‘Failing to do the maths’ The top Inheritance Tax mistakes Britons KEEP making

Inheritance tax: Financial advisor provides advice

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Inheritance Tax is the common tax levied on someone’s estate after they have died, which can include their money, possessions and property. No IHT is paid if the value of your estate is below the £325,000 threshold or if the person leaves everything above the £325,000 threshold to their spouse, civil partner or charity.

The latter practice is referred to as a gift and is a common tactic people use to reduce their Inheritance Tax bill.

According to Jim Sawyer, a Client Partner at financial firm Kingsley Napley, many families who have never had to worry about IHT should consider planning if they want to avoid paying a big price.

He said: “As you know, the bulk of IHT take is from moderately well-off people whose principal asset is the family home.

“Hence there is often a strong desire to pass on that home tax-free even though in most cases it is promptly sold by the recipients.”

Speaking exclusively to Express.co.uk, the tax expert has revealed the five most common mistakes Britons make regarding Inheritance Tax and how to avoid them in the future.

Misusing gifts

No Inheritance Tax is paid on gifts between spouses or civil partners. Gifts can include money, household items, stocks and shares, and property.

However, Mr Sawer cautions Britons on the using gifts to reduce the amount of IHT paid on a family home as it does not alway guarantee a significant in cash being saved.

“Making gifts to mitigate IHT where the asset values mean there’s no likely IHT liability on death,” he explained.

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“Worse, sometimes by doing so, the individual is condemned to financial insecurity in old age.”

‘Gift without reservation’ rules

On top of this, the financial expert is cautioning the public on the danger of ‘gift without reservation’ rules which could affect how much people save in IHT.

He added: “Giving away the family home to one’s children and continuing to live there – this is ineffective under the ‘gift with a reservation’ rules.

“There is loss of Capital Gains Tax (CGT) private residence relief and no CGT base value uplift to date of death, putting the house at risk of being sold from under you by your child (or children) – or a forced sale on a child’s bankruptcy, divorce or untimely death.”

Putting your property into the wrong trust

According to Mr Sawer, different trusts may offer varying degrees of protection from Inheritance Tax and families should be aware of this before placing any of their estate in one.

He explained this is known as putting one’s home into what is often labelled an asset protection trust.

“This may attract lifetime IHT as well as constitute a ‘gift with a reservation’, it may also attract ‘10th anniversary charges’ to IHT and the loss of the CGT base value uplift on death.

Bad maths

On top of this, the tax expert is warning those looking to save money that a simple case of doing the proper maths could be affecting how much they are getting back.

“Failing to do the maths on taking an equity release loan secured against the house (allowable as a debt for IHT on death) and giving the money away,” Mr Sawer added.

“The Inheritance Tax saving is eroded by compound interest accruing on the loan.”

Residence nil rate band

Finally, Mr Sawer emphasised the importance of the residence nil rate band in helping households save as much money as they can when their loved ones pass away.

He said: “Losing the residence nil rate band (including that of your late husband/wife) if the home is left on life interest trust for a new partner to whom you’re not married (or they’re given a right to occupy for their life), even though your children are ultimate beneficiaries.

“The property will be taxed on both your death and your partner’s death with no residence nil rate band available in either case.”

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