Inheritance Tax (IHT) in the UK is widely misunderstood and the subject of a number of myths. Here are five of them…..
Myth 1: 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 had not 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 2: My Non-Domiciled spouse will inherit free of IHT
69% of children born in London in 2016 were to a foreign born parent. If that parent had been resident in the UK fewer than 15 years they may not be automatically deemed domiciled in the UK. That means that they do not have the automatic right to an exemption from IHT on the death of their spouse. They instead receive an additional Nil-rate band of (in 2018/19) £325,000. Even on modest estates the inclusion of life insurance could easily push that value over £650,000 and thus become taxable.
The key point is that it is absolutely vital to ensure all insurance policies are written into trust.
Myth 3: I will only pay UK inheritance tax (IHT) on my UK assets.
As most British citizens be deemed UK domiciled on death, it is important they understand that this means their worldwide assets will become subject to UK IHT. A common misconception is that just UK assets are caught. This lack of knowledge could have a profound impact on beneficiaries. With UK IHT set at 40%, beneficiaries could receive considerably less than intended, and have no available funds to pay the IHT bill.
Eight in ten (82%) UK expats do not realise that both their UK and world-wide assets could be subject to UK IHT*.
The key point is that it is absolutely vital to ensure all assets wherever they are in the world are considered when planning for IHT.
Myth 4: There will be no IHT to pay if I give my home to my children, but they let me continue to live there and I survive for at least seven years.
Unfortunately, unless you pay a market rent, the home will continue to be treated as part of your estate for IHT purposes. This is because it would be regarded as a gift subject to a reservation of benefit (GROB).
The key point is that it is absolutely vital to ensure that only assets that you can afford to do without (or pay for the use of) are given away.
Myth 5: I can pass on £1m free of tax
A new transferable allowance has been introduced which will be worth (by tax-year 20/21) £175,000 for parents who leave their main home to their children and grandchildren. That effectively lifts the IHT nil-rate band from £325,000 to £500,000 per parent, or £1m for married couples and civil partners.
The additional nil-rate band was worth £100,000 when it was introduced in the 2017-18 tax year. It will then jump by £25,000 over each of the subsequent three years until it finally hits £175,000 in 2020-21. From that point it will rise in line with inflation. The additional allowance will only apply to family homes – it won’t cover other assets, including buy-to-let properties and second homes – and will gradually be withdrawn for estates worth more than £2m.
The key point is that for larger estates that may be worth more than £2m, careful planning should start early to maximise the use of available reliefs.
If you would like to receive more information about Inheritance Tax please get in touch. You can, email us at firstname.lastname@example.org or call us on 01932 830 664.