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Successful IHT planning can save your loved ones thousands of pounds, but it’s not always as easy as it sounds. Opportunities may be missed, or a misunderstanding of complex rules could scupper your efforts.
Below, we reveal the most common mistakes, plus tips on how to get your IHT planning right.
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Rising property prices mean lots of people will have wealth tied up in their home. But while you can give away your home to reduce the taxable value of your estate, there are strict rules to follow.
Alan Barral, a financial planner at Quilter Cheviot, says that one of the most common IHT planning mistakes advisers see, is people who give their home to their children but continue to live there rent-free. “HMRC will usually treat this as a ‘gift with reservation’, meaning the property can still be counted as part of the estate, so no inheritance tax is saved.”
That means, for this strategy to work, you either need to move out – and get no further benefit from your home – or pay a ‘market rent’ to live there.
James Scott-Hopkins, founder of wealth management firm, EXE Capital adds: “Incidentally, if the rent might be too large a commitment, it is possible to gift a share of the house for a reduced rent.”
Gifts with reservation of benefit rules apply to any valuable asset you give away, not just property. This could include, jewellery, art or antiques.
He adds: “It’s not enough to gift a valuable asset, such as a painting, whilst retaining it in your house, as this could be interpreted as still enjoying the benefit. It must be seen to have been an outright gift and to have left the estate.”
Ben Clapham, financial planning director at advisers Shackleton, says that a well-drafted will is one of the most important IHT planning tools. “A will that no longer reflects a client’s assets, family circumstances, or tax planning can undo years of good work. We regularly see situations where lifetime planning and wills are misaligned, creating either unnecessary tax liabilities and/or family tension.”
This is particularly important if you remarry, which will make a previous will invalid. “As family dynamics have changed over the years, many older wills fail to protect children from a first marriage, meaning assets pass outright to a new spouse and, ultimately, outside the original family entirely, often with significant and unintended inheritance tax consequences.”
He adds: “A well-drafted trust within a will can give a surviving spouse access to assets during their lifetime, while preserving value for children and helping mitigate future inheritance tax on the second death.”
If you live in Scotland, ‘legal rights’ mean that your spouse and children will still have a right to the value of your ‘net moveable estate’ (the value of your estate not including land and buildings, minus debts and certain expenses.)
If you don’t have a will at all, your estate will be distributed according to the rules of intestacy. Adam Vanstone, chartered financial planner at Chester Rose Financial Planning, says these rules “rarely align with personal wishes and can increase the IHT payable.”
Vanstone adds: “It is paramount that a professionally drafted will is in place and reviewed regularly, especially after marriage, the arrival of children, divorce, or major financial changes.”
Jocelyn Davis, an estate planning specialist at Evelyn Partners, adds that problems can also occur when a will leaves assets to wealthy older people, increasing their own inheritance tax liability. “If advice is taken, it is possible for this situation to be rectified within two years of the death of the benefactor. This involves using a deed of variation to allow a beneficiary to give up their inheritance and pass it onto alternative beneficiaries, such as their own children.”
Giving away your money doesn’t just cut your tax bill. Many people really enjoy seeing their loved ones get the benefit of your wealth, especially if they are struggling financially. But Philip Lewis, head of financial planning and advice at Evelyn Partners, says it’s important not to neglect your own finances.
“Just as you are advised to put on your own lifejacket before assisting others, the same principle applies to financial planning. Before making significant gifts, it is crucial to have a robust financial plan that accounts for future uncertainties, including potential long-term care needs. Without this, individuals may inadvertently give away more than they can comfortably afford, a mistake often only recognised in hindsight.”
If you’re giving away money with the dual intention of planning for IHT and that so your local authority will have to contribute to your future care costs, be aware that this can backfire if your local authority decides this was ‘deliberate deprivation of assets’.
While some people will worry about IHT and rush into make lifetime gifts, others will leave it to the last minute.
Davis says: “The most common IHT planning mistake that we see, which eclipses all others, is leaving planning too late. We are often approached by people in their late 80s or 90s who have decided it’s time to start thinking about inheritance tax. Although there may be some scope for planning, this becomes more difficult with age.”
For example, you’ll need to live seven years for many gifts to become wholly tax-free. That means, it’s best to start gifting while time is still on your side.
There are also lots of allowances that enable you to make smaller gifts that will immediately be tax-free. These include the £3,000 annual allowance and regular gifts from surplus income (where you can give away as much as you like, so long as you can demonstrate that payments were made from your spare income and did not affect your standard of living).
Clapham says that while some retirees might be dismissive of these allowances – as they don’t permit larger gifts – they can be incredibly powerful over the years. “Used consistently, these types of gifts can remove substantial value from an estate over time.”
Vanstone adds, that ideally, retirees should start IHT planning in their 60s or 70s, rather than their 80s or 90s.
While gifting can be an effective way of getting money out of your estate, it’s important to back them up with proper records.
Clapham says: “Executors of wills are often left trying to reconstruct years of transactions with incomplete information, while HMRC defaults to a conservative interpretation of the rules, often resulting in an unfavourable position.”
He adds: “A simple, well-maintained record of gifts, dates, values, and sources of funds can significantly reduce uncertainty, delays, and the risk of unnecessary tax being paid.”.
If you are using the regular gifts from surplus income exemption , you’ll also need to keep records of your income and expenditure during those years. This will help you prove that the gifts were made from surplus income.
Your executor will eventually need to fill in HMRC form IHT403, which covers gifts and transfers of value, so your records will be a huge help to them in doing this.
When it comes to making larger gifts, Vanstone says taper relief can be a huge source of confusion.
“For larger gifts, the donor will usually have to survive for seven years. Here, there is a common misconception that the tax applied reduces if death occurs from year three years onwards (taper relief). However, taper relief only applies if the total value of gifts made in the seven years before death exceeds the £325,000 tax-free threshold, and it applies only to the excess.”
This means that if you make a gift a below this threshold and don’t survive the full seven years, you wouldn’t get the benefit of taper relief.
While your gift of £325,000 should be tax-free even if you die within seven years, what that means is that you’ve used up your tax-free threshold (though you may still have the residence nil-rate band on top, if leaving your home to your child or children), so the total IHT bill on the estate will be the same as if the gift was still in the estate.
Lewis explains: “When calculating inheritance tax, gifts made within seven years of death are deducted from the nil rate band first, which can reduce the allowance available to offset the rest of the estate.”
It can be useful to know that if tax on those gifts does become payable, the tax would be paid by your estate – HMRC would not go back to the recipient of the gift and ask them to pay the tax.
If you’re worried about inheritance tax, it’s important to take advice. A specialist estate planner can help you calculate your liability and prepare a watertight plan that won’t jeopardise your own financial security.
Clapham says: “As financial advisers, we often see well-meaning plans unravel after someone dies, because actions did not quite match intentions, or because key details were overlooked when plans were made, often many years earlier. The good news, however, is that many of the costliest mistakes are avoidable when advice is clear, realistic, and grounded in how HMRC actually applies the rules.”
Saga Legal has partnered with Co-op Legal Services, who provide regulated legal services, helping to ensure you have the right level of support and protection for yourself and your family. They can give advice on topics including how a will could reduce the impact of any potential inheritance tax, and why a trust will might better protect your home and savings. You can book a free legal review to get the guidance you need. After your free review, if you choose a product or service, they’ll explain any fees and costs to you clearly.
You can only use the free legal review service if you live in England and Wales. If you’re in Scotland or Northern Ireland, you can get estate planning help from Co-op Legal Service’s trusted partners.
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Worried about inheritance tax? By putting in place the right will for your needs, you can protect your home, assets and savings.
You can book a FREE legal review, to get the guidance you need on IHT in relation to your will. T&Cs apply.
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