The truth behind 5 common Inheritance Tax myths

Inheritance Tax (IHT) can be an emotive subject. After all, you’ve worked hard to build your wealth and create a lifestyle you love, so it’s natural to want your loved ones to be able to benefit from this after you’re gone.

The thing is, misinformation is rife when it comes to this much-maligned tax. A lack of understanding can mean that you miss opportunities for tax efficiency in your estate plan. One of the ways that you can help to mitigate a future bill is to understand how IHT works.

Read on to learn the truth behind five of the most common myths about IHT and how you can put plans in place that mitigate your estate’s potential bill. 

1. “Inheritance Tax only affects the super-rich”

While not all estates will be liable for IHT, it’s not accurate that only the wealthiest of people are affected by it.

In 2023/24, the nil-rate band is £325,000, so anything below this threshold won’t be liable for IHT. In addition, the residence nil-rate band is £175,000 in 2023/24 and applies if you are passing on your home to your children or other direct descendants. So, you could potentially pass on up to £500,000 of assets to your loved ones free from IHT.

While this may seem like a lot, when you factor in the value of your home with your other assets such as savings and investments, the value can quickly add up.

Moreover, the threshold above which IHT is payable has been frozen until at least 2028. If house prices and other assets rise in value, you could find that more of your estate exceeds the nil-rate band and residence nil-rate band.

2. “Gifted assets aren’t liable for Inheritance Tax”

Gifting can be a helpful way to reduce the value of your estate for IHT purposes, and there are some allowances that mean the financial gifts you pass on to loved ones are immediately exempt from IHT. In 2023/24, these include:

• One-off gifts of up to £3,000, known as your “annual exemption”

• Up to £250 to individuals that have not received your annual exemption

• Regular gifts made from your income.

However, outside of these allowances, financial gifts known as “potentially exempt transfers” might be liable for IHT if you pass away within seven years of giving them. The rate that is payable on these gifts depends on a few factors, including the length of time between you giving the gift and passing away.

As you can see, gifting for IHT purposes can be complex, so it may be sensible to consult a financial planner for advice before doing so.

3. “Your home isn’t liable for Inheritance Tax if you pass it onto your children”

As you read above, the residence nil-rate band of £175,000 (in 2023/24) may apply if you are passing your home on to your children or other direct descendants, in addition to the nil-rate band of £325,000.

Remember, though, that the value of your home could exceed this threshold. If this is the case, the portion of the value that exceeds the residence nil-rate band may be liable for IHT.

Additionally, the residence nil-rate band tapers for estates that are worth more than £2 million. In 2023/24, your residence nil-rate band is reduced by £1 for every £2 of your estate that exceeds the £2 million Taper Threshold.

Consequently, if your estate is worth £2.35 million or more, you may not benefit from the residence nil-rate band at all.

4. “Your partner can inherit your estate without paying Inheritance Tax on it”

While this may be true in certain circumstances, there are a few points that you may still need to consider.

The first point is that you can only pass the entirety of your estate to your partner if you are married to them and have stated in your will that this is what you want to happen.

If you are married but don’t have a will, your assets would be distributed according to the laws of intestacy. This would mean that your spouse could inherit your estate up to the value of £322,000 and anything that exceeds this threshold may be given to your children or other close relatives. This may go against your wishes and can also be very time-consuming since it must go through the courts.

The other important point to note is that if you are unmarried and don’t have a will, your partner is not automatically entitled to receive any of your assets.

5. “Assets that are held overseas aren’t liable for Inheritance Tax in the UK”

For UK-domiciled individuals (those who call the UK home and pay taxes here), any assets you hold across the world are usually considered part of your estate. This means they are included in calculations about how much IHT your estate is liable for.

Depending on your tax position in the country where the assets are held, your estate may receive credit towards the IHT bill in the UK to avoid you being taxed twice on the same asset.

This is a complex area of tax planning, so we recommend that you seek specialist advice if you hold assets in different countries.

Get in touch

If you’re concerned about your estate’s potential IHT liability and would like help creating an estate plan to mitigate a future bill, we can help. Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

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.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.