Inheritance Tax myths busted. Here are 5 facts you need to know

Inheritance Tax (IHT) has long divided opinion, but it’s not only controversial – many people also misunderstand how IHT works and how it’s possible to navigate the rules surrounding it.

With rising property prices and an extended freeze on IHT thresholds until 2028, more people are falling into the IHT trap.

Read on for some popular myths and learn the facts around how sensible estate planning could help you mitigate any IHT liability and leave more of your wealth to family and loved ones.

1. “It raises a lot of money for the government”

While it’s true that the UK government raised a record £7.1 billion in IHT during the 2022/23 financial year. This was more than predicted due to rising house prices, which increased estate values. In fact, HMRC’s figures showed that IHT takings had grown by £1 billion compared to the previous tax year.

By comparison, tobacco duty bought in £10 billion.

So, although there’s been an increase in IHT receipts in recent years, it doesn’t actually raise as much money as some may think.

2. “IHT only affects the super-wealthy”

While you may think that it’s only incredibly rich people who are likely to have to pay IHT, increasing property prices have meant that more people are finding themselves liable.

The good news is that a carefully considered estate plan can help protect your family and loved ones. Plus, it helps to ensure that your money and possessions are passed on according to your wishes.

Your estate is made up of your property, assets, bank account and investments. If you have a spouse, young children, or other dependants, it’s important that you write a will.

Allocating certain assets to your beneficiaries in your will can help you to ensure your estate plan is as tax-efficient as possible.

3. “My partner will inherit everything I leave free of IHT”

Don’t fall in to the trap of assuming that your spouse or civil partner will automatically inherit everything. If you haven’t written a will, your estate could become subject to the rules of intestacy.

Even if you don’t have children, if you haven’t written a will, there’s no guarantee that your spouse will inherit everything. This is just one reason why it’s so important to make sure you put your wishes in writing, in a legally binding will.

Read more: 6 important reasons to write and regularly revisit your will

Having a will is especially important if you’re co-habiting with your partner – particularly if you have children. If you’re not married, you don’t receive any special exemption on money you leave to your partner.

In the 2023/24 tax year, you and your spouse or civil partner each have an IHT allowance of £325,000. You both also have an additional £175,000 nil-rate band if you leave your home to a child or grandchild – this can also include great-grandchildren, adopted children, and foster children.

A surviving spouse or civil partner can claim any unused IHT allowances. As a result, a surviving spouse could have up to £1 million of IHT allowances, as shown below:

• 2 x £325,000 (standard IHT allowance) = £650,000
• 2 x £175,000 (property-related IHT allowance) = £350,000

So, if a surviving spouse left a £1 million estate, including a £350,000 family home, to their children, there would be no IHT charge.

4. “I can only gift £3,000 a year before it’ll be taxed”

It’s a mistake to think you can only gift up to £3,000 a year before attracting IHT.

However, there are no rules to how much you can gift in any given year, and you could choose to give away more. The catch to understand is that anything you gift above £3,000 becomes a “potentially exempt transfer” (PET).

If you survive for seven years after making the gift, no IHT will be due on its value. However, if you

die within four to seven years after making the gift, a reduced rate of IHT may be payable on the value.

This can be a complicated area to understand, so it’s a good idea to seek advice. If you’d like to give a financial gift to your family and loved ones, we can help you understand all the implications of your decision.

It may also be useful to remember that there’s an exemption on “small gifts”, allowing you to make unlimited gifts of up to £250 to different people.

Plus, for wedding gifts, you’re able to gift:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to anyone else.

5. “If I move abroad, I won’t have to pay IHT”

If you live in the UK and are domiciled here, your entire estate is potentially taxable on your death regardless of where your estate is situated.

Should you have plans to retire abroad and think this will mean you can avoid paying IHT, think again. For most people, if your estate exceeds the IHT threshold of £325,000, it will be assessable by the UK authorities in the same way as if you lived in the UK.

An estate plan can help make sure more of your money goes to those you love

Being able to pass on your wealth to your loved ones can be a challenging area to navigate. While you may think that estate planning is simply about IHT, that’s just one part of the puzzle.

We can help to protect your assets and help make sure that more of your money goes to the people you love and care for.

Get in touch

If you’d like to discuss ways you might be able to reduce a potential IHT bill and ensure those you love benefit from all your hard work, please get in touch.

Email hello@bluewealth.co.uk or call us on 0117 332 0230.

Please note

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as, and does not constitute, financial advice.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Blue Wealth Ltd is not responsible for the accuracy of the information contained within linked sites.

Blue Wealth Ltd is an appointed representative of Best Practice IFA Group Ltd, which is authorised and regulated by the Financial Conduct Authority.