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Don’t Make Them: Five Inheritance Tax Mistakes

Updated: Jul 20, 2022

Face reality - make smart choices

Nobody likes thinking about death – particularly not their own.

But, facing that reality is central to the financial planning process, helping you to decide how much you need to save for retirement and how your loved ones will manage when you’re gone.

To ensure this, you must avoid any or all of these five common mistakes of inheritance tax - IHT- planning.

"You spend your working life building up your wealth and you ought to do what you can to ensure that, after you, those you choose can enjoy all of its benefits, without the taxman taking his substantial cut.''

1. Failure to plan Not having any estate plan at all is the most common mistake. Perhaps people fall into this trap because they don’t want to think about it and keep putting it off until it’s too late. Or maybe they simply don’t think through the possible tax consequences for their estate and what these might mean for their loved ones. If you make no provision, it’s possible that when you die your spouse will be faced with a significant proportion of the assets, on which you have both relied, being taken away in tax.

2. Failure to draw up a will Sadly 60% of people in the UK don’t have a will. This is the most basic estate planning tool and everyone should have one. You will die - it's a matter of fact. Many people have the attitude of: 'I won't be alive, so I'm going to spend it.' But what about those you leave behind?

Working on the assumption that you won’t have anything left when you die isn’t necessarily true. If you’re a husband and wife: what happens if one of you dies first and you die without having made a will? Then it can be a long drawn-out and expensive process for your surviving partner to secure control of your assets – at a time when they’re suffering more than enough stress and distress.

There can be particular problems for those with step families or who are not married to their partners. Dying intestate – without a will - is not ideal in any circumstance and we wouldn’t recommend anybody not to have a will, no matter how isolated they might feel.

Failure to make a will can have severe inheritance tax implications. If, for example, you’re single, your estate could go to your parents on your death and this adds a layer of IHT the estate will eventually have to pay.

Your will needs to be reviewed every few years to make sure it still meets your wishes. In addition, when drawing up the will, consider also appointing a power of attorney, so that somebody can handle your affairs, including your finances, if you should become incapacitated.

Avoid mistakes to ensure a happy retirement.

3. Not using trusts The most IHT way of leaving assets to people. But trusts are an often overlooked way of laying down how your estate should be managed after your death. Putting money into a trust means it’s not going into anybody’s estate and, as trusts normally last for 125 years, this means you’re deferring inheritance tax on the estate for several generations. The rules around trusts are complicated and, despite the long term savings, there’s the short term expense in setting one up and they’re not for everyone.

But, they should be considered as part of a strategy for minimising IHT liability.

4. Withdrawing funds from your pension fund and giving them away People like to be kind. They like to give money away to their family and friends. It may be that upon reaching 55 and gaining tax free access to their pension, they want to help children buy a car or even a house.

But, the gifting rules say that only up to £3,000 can be gifted per tax year, although a year can be carried forward if not used. If you make a gift of more than this and then die within seven years, it could be considered for IHT. If you do this, you’ll have taken money out of the IHT-free wrapper of the pension and put it into an estate that is liable for IHT. If you die within seven years, your estate will have to pay tax on that money as though it were still in it.

If you’re making gifts of tens of thousands of pounds or more, this could be pretty significant and the worst-case scenario is that your children, who may well have spent the money, could be left facing a hefty tax bill. If you hadn’t done that and had died at the same age, that fund could have been passed to your children and - if you were under the age of 75 - they could have had it completely tax-free.

Reeves can make sure you avoid these mistakes.

5. Not speaking to a financial adviser An experienced financial adviser - such as Reeves - can review your estate, discuss with you how you want to dispose of it and then help you draw up a tax planning strategy.

Not hav

ing one can have serious implications if you have complicated assets or doubts about your own ability to draw up an estate plan. These are all easy mistakes to make and that makes them easy to avoid. Don’t put off consideration of the problem, seek advice and put in place a tax efficient plan that will avoid hardship, stress and a large IHT bill for your loved ones when you are gone.

​The financial conduct authority does not regulate tax and estate planning. These articles are for information only and are based on specific client circumstances which may be different to yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

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