Britons warned of ‘big’ inheritance tax mistake as ‘many’ unaware they won’t have to pay levy

While inheritance tax receipts have been soaring, a significant proportion of the population remains unaffected by the tax - the most recent HMRC statistics show less than four per cent of estates paid the levy in 2020/21.

Inheritance tax, often dubbed Britain’s most-hated tax, is usually charged on part of an estate above the £325,000 threshold, although it’s possible to increase this by giving one’s house to a child or grandchild.

WATCH NOW: Greg Smith MP discusses inheritance tax

Megan Jenkins, partner at Saltus, told GB News: "Mitigating inheritance tax (IHT) is high on many people’s financial objectives, and while there are many ways to reduce IHT liability, they must be done right – any mistakes can not only impact the effectiveness of any tax planning, but potentially leave the estate open to an unexpected IHT bill.

“One of the biggest mistakes people make is not being aware of the IHT thresholds – we find many people are worrying about an IHT problem they don’t have, while others are not aware of one they do.

“In the UK, everyone is entitled to a Nil Rate Band of £325,000 and a Residence Nil Rate band of £175,000 if they pass their home to a direct descendant (e.g., children or grandchildren).

“This can also be passed between spouses if unused on death meaning a married couple who wish to leave their home to their children could have an estate up to £1m before IHT is due.”

For those who do think they’ll be affected by inheritance tax, there are several ways in which liabilities could be legally reduced.

Writing a Will, and keeping it up to date, could be worthwhile for this.

Ms Jenkins said: “A common IHT planning mistake is either not having a Will in place at all, or having one that is out of date.

“It is a common assumption that without a Will everything will automatically pass to the spouse, however, due to the rules of intestacy this is not the case.

“A Will is a way to control how the estate is distributed and ensure no unnecessary IHT is due.

“Assets passed between spouses are entitled to an exemption for IHT, therefore it is important to have an up to date will to ensure you are able to make use of this.

“Without one, children would share in part of the estate and depending on the value of the assets, there could be a potential inheritance tax liability.”

Making use of inheritance tax gifts allowance could also be beneficial in terms of inheritance tax bills.

“Gifting is a popular way to mitigate IHT,” Ms Jenkins said.

“Everyone has an annual exemption of £3,000, as well as gifts out of regular income - it is with these ‘regular gifts’ that mistakes are often made.

“To be classed as a ‘gift out of regular income’, the gift must come from ‘surplus’ income not ‘capital’ and must leave the person making the gift able to maintain their standard of living.

“Therefore, if making the gift results in the person having to draw upon capital to make up for it, it wouldn’t qualify.

“The gifts must also be regular, for example, a monthly contribution into a grandchild’s savings account.

LATEST DEVELOPMENTS:

• Parents urged to check savings accounts to avoid ‘unnecessary tax bill’
• Britons giving gifts to loved ones urged to beware inheritance tax ‘trap’
• How much you can gift to grandchildren under inheritance tax rules

“Many people make these types of gifts but fail to keep an ongoing record of them. To make use of this exemption it’s important to keep a record so the executors of the estate have evidence.”

Ms Jenkins also warned people who decide to gift their home to loved ones to be careful in how they do this, as in some ways, it might still end up leading to an inheritance tax bill.

“Gifting the family home to children or into trust and continuing to live in it is certainly possible but doesn’t have the IHT benefits people think,” she said.

“Any gift to help mitigate IHT should be irrevocable and the person making the gift should have no ongoing benefit from it. Therefore, continuing to live in your home after gifting the home will mean the gift is ineffective.

“People often think that selling their home to their children at below market price could be a good way to gift the home without an IHT liability, but this is not as easy as it seems.

"HMRC would consider the difference between the market price and the sale price a gift for IHT purposes therefore, if the seller dies within seven years of the sale, the home would be brought back into the estate and potentially taxable.

“IHT mitigation is a complex form of tax planning and it’s essential to get it right. To avoid these common mistakes and get the best results, it is important to seek professional advice.”