If you want to maximise the wealth you pass onto the next generation, it’s amazing what a difference some simple inheritance tax planning can make.
Be careful though, because a lot of the misguided “advice” out there can land you (or perhaps more accurately, your family) in a worse position than you started.
As expert financial advisers, we’re here to help you sort fact from fiction and make your goals a reality. Let’s start by setting the record straight on these seven inheritance tax myths.
Myth 1: The only way to avoid inheritance tax is to put my assets into complicated trusts
There are actually many other ways you can avoid inheritance tax. Some are very simple. For example, you can “gift” away up to £3,000 a year without any inheritance tax consequences. Larger amounts are exempt from inheritance tax if you live for seven years from the date of the gift, so it’s good to do in your younger retirement years when you’re in good health.
Myth 2: A life assurance plan can pay back to me on my death to clear any inheritance tax bill
Take care here. If a life assurance sum assured pays back to you (your estate), it will add to the value of your estate and actually increase your inheritance tax liability. The particular way the life assurance plan is set up and is paid is key. Expert advice can help you get the benefits you want without exacerbating your inheritance tax liability.
Myth 3: I own a house so will benefit from the extra £175,000 inheritance tax allowance for property
Not necessarily. If your estate is over £2m, you may well lose some or all of this extra allowance. The wording of your Will is key, too. As a general rule, make sure any children are the ultimate beneficiaries of your estate to receive this additional allowance. Having an up-to-date Will is also essential.
Myth 4: My family will benefit from my estate when I die, so I don’t need to worry about inheritance tax liability
Sometimes this might be the right route, but if you have excess capital now that you’re unlikely to ever use, it could be sensible to pass this to your family while they’re in their younger adult years with mortgages and school fees to pay, rather than them receiving it once they’re near, or in, retirement.
Myth 5: My ISA is tax free, so I don’t need to consider it for inheritance tax planning
Your ISAs are only tax-free while you’re alive. Although an ISA allowance can be passed on your death to a surviving spouse equal to the amount of your ISA, ISAs will form part of their estate and be subject to their inheritance tax. So, don’t leave your ISAs untouched in your lifetime for this reason – spend them and enjoy!
Myth 6: Any money I use to mitigate future inheritance tax will still take seven years to leave my estate
Although this is generally the case, there are investment vehicles that can reduce potential inheritance tax within two years of the investment start date. These include Enterprise Investment Schemes and certain investments into the Alternative Investments Market. As higher risk investments, these aren’t appropriate for everybody and it’s prudent to limit your exposure to these assets. We recommend getting financial advice before investing in these types of investments.
Myth 7: My executors will be able to pay my inheritance tax bill from the value of my estate
Your inheritance tax bill needs to be paid within six months of your death and as your executors can’t sell assets in your estate to pay the inheritance tax bill, this often causes a headache. In this case, the executors may need to take out their own loans to cover the bill. The proceeds of your estate can’t be distributed until this is settled. A useful trick is to use your pensions after other assets have been used for retirement income, as most pensions are deemed outside of your estate and not subject to inheritance tax. Therefore it is important to review who the beneficiaries of your pensions are with a Financial Planner so the pensions can be used to help with your inheritance tax bill.
Get advice you can trust
As experienced Chartered Financial Planners, we’re here to help you take care of inheritance tax planning and leave the best possible legacy to the next generation. Contact us for a free chat or learn more about how we can help.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.