Common Misconceptions About Inheritance Tax

The following ideas about IHT somehow seem to have entered the public imagination.

They are all wrong:

If I put all my assets offshore then they won’t be charged to Inheritance Tax.

WRONG!

This is wrong. UK domiciliaries pay IHT on all their assets worldwide.

If I put all my assets in the name of somebody else, they won’t be charged to IHT.

WRONG!

This is wrong. I know people who’ve taken the hugely risky step of putting their homes and investments into their children’s names, in the utterly mistaken belief that it will save tax. Gifts obviously do have their place in tax planning, though, and are discussed in some of my other posts.

I can put all my assets into trusts, and carry on treating them as my own. They’ll then be tax free.

WRONG!

Not so. Generally, the type of trust which is tax effective is the type which prevents you from benefiting from it. Your advisers can perform minor miracles on your behalf with trusts, though, and some of the strategies are mentioned in other posts.

I can form a charity and run my life through it. Then everything I do will be tax free.

WRONG!

Not so, either. Money put into a charity can never be withdrawn again for private purposes. By all means give money to existing charities. By all means create a charity if you have an enterprise that deserves charitable status. But don’t think of a charity as the core of a tax-plan, because that will not work.

If I hold my assets jointly, they won’t be part of my estate, and therefore won’t be taxable.

WRONG!

This is wrong. Your “tax estate” is bigger than your “estate”, and includes your share of jointly held assets.

I expect this misconception arises from two things:

a.            firstly because a little knowledge of the law is a dangerous thing, and many people have cottoned on to the (correct) idea that joint assets are not in your “estate”; and

b.           because, in fact, assets held jointly by a husband and wife do pass to the survivor inheritance tax free – and people have seen this happen, perhaps with their parents. However, that had nothing at all to do with the joint ownership: transfers between husbands and wives always are inheritance tax free, due to the “spouse exemption”.

The “£3,000-a-year gift”, which is mentioned so often in the financial pages of the newspapers, is one of the best things you can do to save tax.

WRONG!

Not really. It is quite a painless way of saving tax, but you would have to do it for years and years before you made any serious inroads into your tax problem. The rules are explained in other blog posts. But look at other, better, strategies first. And, as explained here, limiting yourself to £3,000 is not necessarily wise.

Debts are Deductible.

WRONG! ish

I always have trouble with this one. After all, debts ARE deductible from your tax estate, so my clients are always a bit nonplussed when I insist on ignoring their debts when I calculate their inheritance-tax exposure. But there is method in my madness. The trouble with debts is that so often they come with built-in safeguards for paying them off. Endowment mortgages, for example, have life-cover built into them. Repayment mortgages are usually attached to mortgage protection policies. Credit card debts, store cards and financing deals are often covered by payment protection.

Also, these protections usually kick-in on the first death. So a young couple with 10% equity in a £1million home, and not much else, might think of their wealth as £100,000 and therefore outside the tax net, whereas actually the second-death estate would be £1,000,000, with a six-figure tax exposure.

Besides, guess what, if we find that you do have unprotected debts, then we’ve already discovered an inheritance tax saving!

Always start calculating from your gross estate.