Top Five Misconceptions about Inheritance Tax
There is a lot of confusion about Inheritance Tax. Here are the most frequent urban myths I come across:
1. You have to pay Inheritance Tax on any Inheritance you receive under a Will.
This is a common misunderstanding. In actual fact, the Executors of the Will pay the Inheritance Tax due on the deceased’s Estate before they pay your inheritance to you. It is more sensible to think of Inheritance Tax as a “Death Duty” because it is a tax paid by the deceased, not on inheritance which you receive.
2. Everyone has to pay Inheritance Tax when they die.
Actually most people don’t pay Inheritance Tax. Everyone has what HMRC call a “Nil Rate Band” of £325,000. As long as your Estate falls under that limit you don’t have to pay any Inheritance Tax at all. There is also preferable treatment for spouses and civil partners who benefit from Transferable Nil Rate Bands, so there is often no Inheritance Tax to be paid on either death.
3. If you put the Title of your property into your children’s names you don’t have to pay Inheritance Tax on it.
This is what HMRC call a “gift with reservation of benefit”. If you put the Title of your property into someone else’s name, but continue to live there – HMRC will simply ignore the “gift” and calculate the Inheritance Tax as though you still owned the property.
There are also a range of problems that gifting your property can cause. You shouldn’t consider gifting your property until you have taken sensible and thorough advice.
4. If you gift any asset, as long as it is before you die, then you don’t have to pay Inheritance Tax on it.
This isn’t true because your Executors have to investigate whether you have made any gifts in the seven years preceding your death. They have to notify HMRC of the gifts which will be included in the calculation of Inheritance tax.
5. If you put your bank account into the names of your children then you don’t have to pay Inheritance Tax on it.
It doesn’t matter if the account is in someone else’s name; if it wasn’t a gift then the account belongs to you and your children are simply holding it for you on Trust. Your Executors will have to disclose the account and pay Inheritance Tax on its value.