Inheritance tax (IHT) has been around in one form or another since 1694; however, despite being applicable for generations, the rules are arguably more complex than ever.
It was largely for this reason that the Government commissioned a report from the Office for Tax Simplification last year to make recommendations to clarify the rules and improve understanding amongst individuals.
Alongside this complexity, a number of common misconceptions appear to exist around IHT planning, and the combination of these two issues can often put many off taking action to reduce their IHT liability. This article considers five of the most common of these we experience when discussing IHT with our clients.
1 – IHT planning involves trusts
Trusts can be used as a very efficient option to potentially reduce your IHT liability, and the structures hold a number of benefits. However, trusts are just one of many options that exist to aid individuals in reducing their IHT liability. The most appropriate option will be dependent on each individuals’ circumstances, and often a combination of these will be the most suitable.
2 – IHT planning takes seven years for it to be successful
The ‘seven-year rule’ has been a part of IHT legislation for many years and means individuals must live for a further seven years after making gifts or settling money into a trust for the funds to fall entirely out of their estate. However, there are other planning options available that can be successful in reducing your IHT liability after two years, and even some planning which is outside of your estate immediately.
3 – I have to give my money away
Many believe that to reduce their IHT liability they must cease to have access to some of their capital, but this is not the case. There are structures available that are IHT efficient and allow you to retain the monies in your name, with the ability to potentially access some or all of this, should your circumstances change, for example, care fees. There are also options which provide a guaranteed known income stream.
4 – It is too late
The thought of planning for when we are no longer here, is very difficult for many of us to consider and for this reason many individuals put off IHT planning for as long as possible, to the point where they may feel it is too late. Whilst it is always best to plan early, and leaving planning until later may restrict the options available to mitigate your IHT liability, there are a number of steps that can be taken late in life, including certain ‘death bed planning’.
5 – It is complicated
The rules surrounding IHT can be complex and often changing, however much of the planning aimed at reducing your liability is remarkably simple, for example gifts to children or establishing life assurance.
Hazlewoods Financial Planning provides holistic support in IHT planning, incorporating the expertise of our accountancy and financial planning colleagues. Please contact Andy Hogarth on 01242 680000 or andy.hogarth@hazlewoods.co.uk if you would like an initial conversation regarding addressing your IHT liability.