Mitigating Inheritance Tax: The four most common mistakes

Inheritance Tax (IHT) planning is essential to ensure that your beneficiaries receive the maximum benefit from your estate.

However, many individuals make critical errors in this process. Here, we pinpoint the four most common mistakes people make when trying to mitigate IHT in the UK.

Failure to understand the IHT thresholds

The UK has specific thresholds, known as nil-rate bands, which determine how much IHT is due. The current nil-rate band is £325,000 per person. Assets exceeding this amount are taxed at 40 per cent.

However, property owners also benefit from the residence nil-rate band, which provides an additional £175,000 where a person’s main property is passed to a direct descendant.

Any unused allowance for either the nil-rate band or residence nil-rate band can be passed on to your spouse and civil partner. This means that a couple has the potential to pass up to £1 million tax-free to eligible beneficiaries.

Many people fail to optimise their estate to align with these thresholds, which can result in a substantial tax bill.

Regularly update yourself on the current thresholds and utilise gifts, trusts, and other mechanisms to maximise the nil-rate bands available.

Overlooking the seven-year gift rule

In the UK, gifts given seven years before the donor’s death are not subject to IHT, while gifts given three to seven years prior to death are taxed on a sliding scale.

While few of us can plan our own demise, with the right approach to tax planning it is possible to start making gifts well ahead of your passing to reduce a potential tax bill. However, many overlook this rule and do not plan early enough to take full advantage of it.

Start your estate planning early and consider how you can utilise the seven-year gift rule to reduce the potential IHT liability.

Not making use of trusts

Trusts can be an incredibly useful tool in IHT planning. They allow you to control how your assets are used, even after your death and can even put measures in place to ensure dependents are cared for financially throughout their lives.

Despite this, trusts are often overlooked, possibly because of their perceived complexity and the need to manage them over time through the appointment of trusees.

Consider setting up trusts to hold assets, which can help in efficiently distributing your wealth and potentially reducing the IHT liability.

Failing to seek professional advice

IHT laws are complex and continually evolving. Despite this, many individuals try to navigate this area without seeking professional advice, which can often lead to mistakes and missed opportunities for tax-saving.

Consult with a tax advisor experienced in IHT planning to guide you in making informed decisions and optimising your strategy to reduce IHT liability.

Mitigating IHT in the UK requires a sound understanding of the tax regulations and the various allowances and reliefs available.

By avoiding the common mistakes highlighted above, individuals can craft a more effective IHT strategy, safeguarding their assets and ensuring a better financial future for their beneficiaries.

If you would like IHT advice carefully tailored to your needs, please contact us.