Inheritance Tax is a tax on the estate of someone who has passed away. Many people fail to address Inheritance Tax in time, which can lead to costly mistakes for their heirs. Aston Bond has outlined the top five mistakes made when dealing with Inheritance Tax and how you can avoid them.
1.Not Making a Will:
Failing to make a Will is one of the most common Inheritance Tax mistakes. If you die without a Will (intestate), your estate will be distributed according to UK Intestacy Laws, which may not align with your wishes. This can lead to higher Inheritance Tax liabilities and disputes among family members.
To avoid this, ensure that you draft a legally binding Will with the help of a solicitor, regularly review and update it accordingly. A clear Will not only reduces potential tax exposure but also ensures that your estate goes to your intended beneficiaries.
2.Ignoring the Nil-Rate Band and Residence Nil-Rate Band:
The Nil-Rate Band (NRB) is the threshold up to which an individual’s estate can be passed on without incurring Inheritance Tax. It is currently set at £325,000, and any value above this is typically taxed at 40%, though additional allowances may apply, such as the Residence Nil-Rate Band (RNRB). The RNRB is an additional Inheritance Tax allowance for individuals who leave their primary residence to direct descendants, such as children or grandchildren. It is currently set at up to £175,000, on top of the standard NRB. Many people fail to utilise the NRB and RNRB allowances efficiently resulting in an increased Inheritance Tax liability.
Make sure you understand these thresholds and structure your estate to maximise their benefits. For instance, if your estate is over the £2 million threshold, you may lose the RNRB, but strategically gifting or trust planning can help reduce the value of your estate. Professional advice is essential here as the process can be difficult to navigate.
3.Not Making Lifetime Gifts:
Some individuals delay giving away assets during their lifetime due to concerns about needing them later, or they misunderstand the “seven-year rule”. By holding onto assets until death, they inadvertently increase their estate’s Inheritance Tax liability.
You can avoid this by making use of Inheritance exemptions, such as:
- The annual gift allowance of £3,000 per year.
- Unlimited gifts of up to £250 to multiple individuals.
- Wedding gifts (e.g., £5,000 for a child).
- Regular gifts out of surplus income, provided they don’t affect your standard of living.
Larger gifts fall under the “seven-year rule”. If you survive seven years after making the gift, it’s exempt from Inheritance Tax. Plan these gifts early to minimise your taxable estate.
4.Failing to Use Trusts Effectively:
Many people overlook Trusts as a tool for Inheritance Tax planning. This can be because they seem complicated, or because they don’t seek the proper advice. However, assets placed in Trusts can potentially be removed from your estate for Inheritance Tax purposes.
You can explore options like Discretionary Trusts, which allows you to place assets in a Trust while retaining flexibility over who benefits. Trusts can also protect assets from being taxed multiple times or falling into the wrong hands (e.g., in the case of divorce or bankruptcy). A Private Client solicitor can help you chose the right Trust for your needs.
5.Not Seeking Professional Investment Advice:
When planning for IHT, many people overlook the benefits of tax-efficient investments, such as Business Relief (BR) qualifying options. These investments can greatly reduce the taxable value of your estate. However, navigating the wide range of available investment options can be complex, and without expert guidance, you may make costly mistakes or miss valuable opportunities.
You can consult an Independent Financial Advisor (IFA) who specialises in financial planning and can help you identify suitable investment opportunities that align with your estate planning goals and risk tolerance. An IFA will explain the potential returns, risks, and tax implications of different options to ensure you make informed decisions.
While we cannot provide direct financial advice, we work closely with a network of trusted IFAs, who can help you explore your investment options and guide you toward strategies that can minimise IHT liability while aligning with your overall financial objectives.
Aston Bond can put you in touch with an experienced IFA. Taking the time to seek professional advice can make a significant difference in the financial legacy you leave behind.Bottom of Form
Don’t hesitate to contact our Private Client team on 01753 486 777.