This blog covers the main reasons people end up paying inheritance tax and the mistakes that are commonly made. Even small errors in inheritance tax planning can cost you thousands.
People often tend to turn to a high street Solicitor in order to write Trusts into their Wills. However, many Solicitors will not favour writing Trust from an outside space because of the transference of the Nil Rate Band (NRB) and Residential Nil Rate Band (RNRB). You can read our earlier blog, 'The Problems with Basic Wills, ' which explains why it is better for you to use Lifetime Trusts instead of Will Trusts.
Often, people the decision to make percentage gifts to charity. Careful planning is required here too. This is because Wills are easily challenged. For example, if you exclude a family member from your Will after a dispute, you are opening up for your Will to be challenged. It is better to leave a family member something – even £500 – with an explanation as to why there is only a small amount in order to avoid this.
Another common mistake that people make is misunderstanding the rules around Trusts, especially the seven-year rule. The fourteen-year rule also causes confusion. These relate to gifts into Trusts, and previous blogs explain how these rules work.
Taper Relief is am area quite often misunderstood. Taper Relief only applies to gifts over the Nil Rate Band.
Using inexperienced Advisors is also something to avoid. Unless they are specialists in the area, many Advisors may have a low understanding of inheritance tax, especially if their clients tend to be younger.
It is essential to get a comprehensive plan before taking any action to avoid any risks or problems.
Reliance on Business Relief plans is another mistake to avoid. Although the plan may have worked for Business Relief when it was taken out, this does not mean that the plan will work for Business Relief when the person dies. The rules can change, so you must make sure that this is being reviewed on an ongoing basis. AIM shares are also a big potential risk, and you can lose a lot of money here due to volatility.
Equity Release Plans (taking the money out and putting it into a Trust) is not compatible with a Business Relief Plan as this would be ‘double counting.’ Again, you would need to talk with a specialist with experience who can advise you on such matters.
Gifting a percentage or all of your Main Residence
This is another thing that you should be careful with. Unless this is a deathbed gift, this process is fraught with risk and should be avoided. If you are going to make a gift of your main residence, make sure you are paying market rent. If you do not pay market rent, then the HMRC will disallow it for inheritance tax purposes. Capital Gains Tax is payable on the sale of your main residence if a proportion is gifted.
In Summary - The two greatest problems!
1. Leaving planning too late is one of the most common mistakes to make. It is not urgent for most people in their 60s to plan for, but it is important.
2. The other most common problem is not getting experienced and comprehensive advice.
Like all matters related to Estate Planning and inheritance tax, experienced advice is essential.
Call us if you require any help.