Inheritance tax – The ‘common pitfall’ which could cost you thousands

Inheritance tax: Graham Southorn explains how trusts can help

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As the cost of living crisis continues many families will be looking at ways they can save money. It is now more important than ever to ensure that estate plans are up to date to avoid being dragging into the costly bracket.

Paul Barham, partner at Mazars, issued a stark reminder to Britons on the common pitfalls he encounters when dealing with estate plans.

By avoiding these pitfalls, Britons can avoid leaving a costly bill unexpectedly.

Inheritance tax receipts for April 2022 to August 2022 are £2.9 billion, £0.3 billion higher than in the same period of last year.

House price growth has been relentless, but with allowances frozen since 2009, this has dragged thousands more estates into the IHT bracket – and 2022/23 looks set to be another record year for the Treasury.

Mr Barham said: “It’s a stark reminder that IHT planning isn’t something that can be looked at once, and ticked off the list. This can be a common pitfall, as the value of your assets change, so must your plans.

“Other IHT planning points which are often overlooked are the use of personal gifting allowances, using clear expression of wish documents or even having a valid will in place.

“To make sure you are making the most of your allowances and putting the right plans in place, they must be reviewed regularly with your tax adviser.

“It is also important to work with a financial adviser, one that you trust and feel has your best interests at heart, to make sure you are using allowances efficiently and that you feel confident about your financial situation.”

He shared his top tips on inheritance tax planning.

Don’t expect IHT to not impact you
Mr Barham said: “Many people don’t realise IHT is likely to impact them. IHT applies to your worldwide assets unless they are specifically exempt, like a pension or assets in many trusts.

“It includes your home, any other properties you own, your savings and investments, including any ISAs, your car and any your personal possessions. The list is extensive, and it can quickly add up. With the allowance frozen until 2026, this could mean more people are subject to the tax as things like houses increase in worth and investments grow.”

He urged Britons to use a calculator, to look at the value of their estate and the assets that they own that would be liable to inheritance tax as they are now. 

This gives their baseline to start planning around and a steer of what their potential IHT bill might be.

The power of gifting
Mr Barham continued: “Gifting is an efficient and effective way of passing wealth to loved ones while at the same time reducing the value of your estate for inheritance tax purposes. Lifetime gifts are immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small Gift (£250 pa) exemptions. 

“If you have a larger disposable income you might want to consider whether they might qualify for the normal expenditure out of income exemption which has no limit.”

Larger lifetime gifts can also be made but they do come with some rules, mainly a seven-year clock. People need to make a gift of any financial amount but if they pass away within seven years of making that gift, then some or
all that gift could be classed as part of their estate for IHT calculations.

Pensions as IHT tools
Mr Barham suggested pensions can be a valuable tool when passing down wealth because they sit outside one’s estate for IHT purposes.

If someone has assets inside and out of a pension plan, they are likely to want to consider when to drawdown from their pension and whether to also consider using non-pension assets to meet the full cost of everyday life.

Make a will
He said: “A will is one of the most overlooked financial documents and is perhaps the most essential thing you can do to ensure your estate goes to who you want and that your wishes are carried out.

“Without a will, your estate will be distributed under the intestacy rules.

“This can mean that some of your estate could be subject to IHT that could have been avoided with legitimate will planning.”

Britons should seek independent advice from a financial advice before moving around any of their assets and to get more information on their estate plans.  

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