Families Unexpectedly Faced with Inheritance Tax Bills Following Gifting Regulation Mistakes - 220 families left in financial shock following a misinterpretation of the inheritance tax gifting regulations.
In the realm of estate planning, understanding and navigating inheritance tax (IHT) can be a complex task. This article aims to shed light on some common mistakes to avoid when attempting to reduce or avoid IHT in the UK.
Firstly, it's crucial to remember that the responsibility of calculating any IHT liability falls on the deceased's executors. This includes gifts made within seven years of death, which are known as "potentially exempt transfers" (PETs). To avoid IHT on these larger gifts, it's essential that the donor survives for seven years after gifting. If they pass away sooner, the gift could still be taxed, albeit with taper relief reducing the tax if they survive 3-7 years.
One common mistake is gifting assets but continuing to benefit from them. Such actions trigger "gifts with reservation of benefit" rules, meaning Her Majesty's Revenue and Customs (HMRC) may still include the asset in the estate for IHT purposes. For instance, living rent-free in a gifted home or continuing to display gifted artwork at your home could potentially lead to an unexpected inheritance tax bill.
Another pitfall is ignoring small gift exemptions and annual limits. You can only gift up to £3,000 each tax year exempt from IHT, plus small gifts of up to £250 per person per tax year. Exceeding these without proper planning can unintentionally use up IHT allowances.
When gifting certain assets like shares or second homes, it's essential to consider capital gains tax (CGT) implications. Gifts of these assets may trigger CGT, even if no inheritance tax is due.
Marriage gift exemptions are often overlooked. Gifts on marriage are exempt up to specific limits but are per marriage event and should be used carefully to maximize tax benefits.
Effective planning of gradual gifting can also help reduce your estate for IHT purposes without significant tax charges. Smaller, regular gifts within annual exclusions can be a strategic approach.
It's also worth noting that from April 2027, unused pension savings will be subject to IHT. Additionally, from April 2026, HMRC will start charging IHT on family businesses.
In some cases, using a Gift Inter Vivos (GIV) insurance policy can help protect your loved ones from potential IHT liability on gifts made during your lifetime. These policies must be written into trust, otherwise the proceeds could become part of the estate and subject to IHT. By being written in trust, the proceeds of your policy will be paid directly to your beneficiaries rather than your estate, avoiding IHT.
Finally, it's important to keep clear records of all gifts, the existence of policies and trusts, and to keep a record of premiums paid as they are treated as annual gifts. Failure to correctly calculate IHT liability could result in the executor having personal liability for unpaid tax.
In conclusion, to effectively reduce IHT, it's essential to avoid gifting assets while retaining benefits, ensure survival beyond seven years for large gifts, utilize annual and marriage gift exemptions, consider CGT implications, and carefully plan the use of residence nil-rate band and other allowances. Consulting a tax adviser is recommended for complex estates.
- To avoid unexpected inheritance tax bills, be mindful of continuing to benefit from assets after gifting, as this could trigger "gifts with reservation of benefit" rules.
- Effective planning of gradual gifting through annual exclusions can help reduce your estate for inheritance tax purposes without significant tax charges.
- It's important to note that from April 2027, unused pension savings will become subject to inheritance tax, adding another layer of complexity to personal-finance planning.
