Inheritance Tax is rarely anyone’s favourite subject, but it is an important part of planning for the future. A lot of the anxiety around it comes from things people have heard rather than from the rules themselves. Once a few common myths are cleared up, the picture is usually far less worrying than it first appears. Understanding the truth behind these myths can make the whole subject feel much less concerning.
Myth 1: Everyone pays Inheritance Tax
In reality, most estates in the UK do not end up paying Inheritance Tax. The threshold over which tax is payable is £325,000, and many estates may also benefit from the residence nil rate band, available if a home, or share of it, passes to direct descendants. This can allow up to £500,000 to pass free of tax, or up to £1 million for married couples and civil partners. The key is understanding how these allowances apply to your own circumstances.
Myth 2: My Will automatically protects me from Inheritance Tax
A Will plays a vital role in setting out who receives what, but it does not create Inheritance Tax savings on its own. Tax planning needs a combination of a well drafted Will and a wider view of your assets, family situation and long-term intentions. Without this joined up approach, opportunities for protection may be missed.
Myth 3: Gifting removes assets from tax straight away
Many people believe that giving assets away immediately reduces Inheritance Tax. In most cases, gifts only fall outside your estate once you have survived seven years from the date of the gift. There are helpful tax-free allowances, such as annual exemptions and small gift allowance, but larger gifts require careful planning and clear records.
Myth 4: Trusts are only for the very wealthy
Trusts can be useful for families of many different sizes and backgrounds. They can help protect vulnerable beneficiaries, manage assets over time and create greater certainty about how money is used. They can also help to protect assets for your children. They do involve rules and responsibilities, but they are far from exclusive. A good solicitor will help you understand whether a trust supports what you want to achieve.
Myth 5: I do not need advice because everything will go to my spouse
If you do not have a Will providing everything will pass to your spouse, then your spouse may not inherit your entire estate. Assuming your Will does provide for this, assets passing between spouses and civil partners are usually free of Inheritance Tax. This can however create unintended consequences on the second spouse’s death if the estate becomes too large, thereby then losing the benefit of some tax allowances, and leading to an overall higher tax liability. Planning as a couple often provides far better long-term outcomes for children and other beneficiaries.
Taking control of your planning
The most effective way to reduce confusion is to review your position with clear, tailored advice. A short discussion can help you understand the options available and ensure your estate passes in the way you intend, with as little tax as possible.
If you would like to discuss your own planning in more detail, please contact Veronique Gutteridge, Associate in our Wills, Trusts and Probate team, for advice. You can call her on 01494 781354 or email veronique.gutteridge@blasermills.co.uk.
