The most common inheritance tax myths:debunked

The tax-free threshold for Inheritance Tax (IHT) has been frozen in cash terms at £325,000 since 2009/10. As everything above that threshold is taxed, larger estates can be subject to a substantial bill.

Whilst there are planning strategies you can take to mitigate your tax liabilities, ranging from lifetime giving, to wills and post-death planning, the area of IHT is highly complex, with the rules governing it often causing confusion.

To help with this, John Rouse, partner in Lodders’ Private Client team, debunks some of the most common myths surrounding IHT.

1.'Only the very wealthy pay IHT' False

A married couple owning a house worth £350,000 and with children, will have a combined IHT threshold of £1 million. This means that IHT will only be due on amounts over £1 million.

The freezing of IHT thresholds and gift allowances over the last decade or so, combined with inflation in property prices, has brought more people within the IHT bracket. This is especially so with the ‘baby boomer’ generation, many of whom own property; the combination of house price inflation and frozen thresholds means more estates are now creeping over the IHT threshold.

2.'A property can be gifted, meaning no tax will be payable on it' Sometimes

A popular IHT planning strategy is to make gifts of assets. However, where the asset is a property other than the main house, any gift will be a disposal for Capital Gains Tax (CGT) purposesso a straight gift will often trigger a CGT liability.

It is also important to be aware of the seven-year clock in relation to gifts. Generally, for a gift to be effective for IHT purposes, the person making the gift has to survive for seven years. Also, they cannot continue to benefit from the property they have given away; if they do, the asset will continue to be treated as part of their estate for IHT.

For example, if a mother decides to give her house to her children and continues to live there, this would not be effective for IHT purposes. However, this could be overcome if the mother pays a full open market rent to her children.

3. 'IHT only applies to property'

False

IHT applies to all assets including someone’s home, cash, savings, investment portfolio and property. IHT reliefs are available against certain assets, such as an interest in a trading business or farmland, subject to certain criteria. The main asset that doesn’t attract IHT is someone’s pension fund.

4. 'Assets abroad are not counted for UK IHT'

False

If you are domiciled in the UK then you are liable for IHT on any assets held across the world, not just the UK. For example, an overseas holiday home would be caught in the IHT net.

John Rouse

E: john.rouse@lodders.co.uk

T: 01789 206167