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3 inheritance tax saving myths and legitimate ways to save
Nobody wants to pay more inheritance tax than they have to, that’s a given.
Unfortunately, we have seen some of our clients taking steps that they think will save inheritance tax when the implications are not properly understood, and this can cause new problems.
What are these inheritance tax saving myths?
Transferring the house into joint names with children
Unless the parents are living with their children and they all keep living together, this will not save inheritance tax on death. If you do not live together and wish to continue occupying the property once the gift has been made, this may still be subject to inheritance tax.
You can get around this problem by paying full market rent to your children for the property you have gifted to them. However, the children would need to declare this and pay tax on it.
Gifts within the Nil Rate Band for inheritance tax
A gift that is outlived by seven years should fall outside the inheritance tax net. If the person making the gift dies within seven years, the gift simply reduces the Nil Rate Band. This is the amount of your estate which can be passed on to your beneficiaries free from inheritance tax on death.
Many people think that there will be a tapering of the gift if they live for at least part of the seven years. Tapering does not in fact reduce the value of the gift. It reduces the tax payable on death, and if there is no tax on the gift, there is no tapering.
Putting the home into a trust to save care fees
Doing this may have not any effect for care fees. Many people also believe that if the house is in a trust, it is not theirs for inheritance tax purposes.
As with the point about transferring the house into joint names with the children, it is extremely unlikely that a person can continue living in the house and for it not to count as part of their estate for inheritance tax purposes.
Furthermore, if the house is in a trust, Residence Nil Rate Band relief (an extra tax relief) may not be available, which could potentially mean that more tax becomes payable.
3 ways to save inheritance tax legitimately
Deed of variation
The beneficiary or beneficiaries of an estate can agree to divert assets to a different beneficiary after the person has died, which can have inheritance tax advantages. For example, if some of the estate has been left to charity, directing a little more may mean that the estate benefits from the reduced rate of inheritance tax.
Assets that are left to a spouse are free from inheritance tax. If a particular asset is left to the children in a will and this has become more valuable than expected, the family may agree to reduce the amount going to the children and increase the amount going to the spouse.
Consider business assets
Certain businesses qualify for relief from inheritance tax. That tax relief could be wasted if the business assets are left to a spouse who does not intend to keep the business. It may be better to draw up a will, making a specific gift of the business to either a family trust or other family members.
Ensure that the relevant inheritance tax reliefs are claimed
A couple (married or civil partners) can potentially leave £1 million free of inheritance tax, assuming they meet certain conditions such as leaving the family home to descendants.
Before taking any steps or worrying about an inheritance tax bill, do check that all these reliefs are available and ensure the executors are aware of them so that they can be claimed.
How can Ann help you?
If you would like advice on any aspect of inheritance tax planning, you can contact her on 01943 885782 or at ku.oc1708873585.fcl@1708873585naits1708873585irhca1708873585.