10 Of The Worst Inheritance Tax Planning Mistakes

Worst Inheritance Tax Planning Mistakes

1: Inaction

The worst Inheritance Tax planning mistake of all is to do nothing, and it’s by far the most common!

Genuine reasons for not planning are few, excuses for not planning are abundant

Apathy typically manifests itself in 3 phases: ‘I am, I will, and why I didn’t’

If that’s you, then change your mindset. Park any thoughts of ‘what’s in it for me?’. Instead, focus on your family, and creating a long term legacy planning strategy

You are custodian of your family assets during your lifetime and you can’t take any of it with you

A properly constructed transfer of wealth between generations of your family will provide greater security, and stability for everyone, including you

Here’s how to tell your family if you just can’t be arsed to plan: ‘One day, son, 60% of all this will be yours – I’m giving the other 60% to the taxman..’

2: Piecemeal planning

You must look at the big picture for Inheritance Tax planning, and that means your family legacy, and how to pass it all to your children and loved ones, tax-efficiently

You need to plan for something that can survive you, for the benefit of your family

It’s not about being sold an investment by a financial middleman, and buying into the story that  by wrapping it in a trust, (assuming that’s done correctly!) you’re somehow solving your ‘Inheritance Tax problem’

The best you will achieve is removing that individual asset from your Inheritance Taxable estate, and likely only after a period of time. Almost certainly there are more tax-efficient ways of achieving that objective

3: Fear of losing control

Fear of losing control

It’s rare for new clients to admit early on in the planning process, that their biggest concern is about losing control during their lifetimes, but that often becomes apparent

Seeing loss of ownership is the real fear, we introduce early into every conversation the reality of the difference between ownership, and control

Know this; you have to divest yourself of some degree of control in order to properly plan for Inheritance Tax

But you don’t need to lose significant control!

Even with a minority interest in a company or partnership you can maintain a high level of control through partnership or shareholder agreements, and the company’s articles

So, get your head around any obsession with ownership

Properly constructed, and planned well in advance, it’s legally possible to achieve the twin objectives of passing on ownership tax-efficiently, and retaining control, right up to the day you draw your last breath

4: Dying without a Will

There are plenty of reasons for making a Will, and only one of them is tax. Without a Will you die ‘intestate’, and the consequences are severe

What happens to your estate is then totally out of your hands, and Intestacy Law will determine who gets what, and it will also dictate the Inheritance Tax position

Broadly, a surviving spouse receives a ‘priority legacy’ of £270,000, and all personal possessions and, if married or in a civil partnership, 50% of the remaining estate. Children receive the other half of the estate

Here’s the real cost of not leaving a Will

If your surviving spouse wants to stay in your family home, and your children want to sell it, then that may need to be resolved by ‘friendly litigation’

In which case, you created a situation where your spouse had to sue your children to remain in your family home..

Not saying it’s going to happen, but it sure could!

5: Gifts that didn’t work

The most common example is ageing parents attempts to gift the family home to their children

Know this; unless the gift is combined with parents paying a full market rent while they remain in the property, it will not work for Inheritance Tax planning purposes

By continuing to live in the family home the parents have ‘reserved a benefit’, and it will be treated as if the property was still owned by the parents for Inheritance Tax purposes

Possibly worse, you may have transferred the family home to owners who may not get Capital Gains Tax ‘Principal Private Residence relief’ when the property is sold

Look out for ‘off the peg’ Inheritance Tax planning schemes for the family home, as they’re very unlikely to succeed

Downsizing and giving away the additional cash, is one possibility. Move out and then give the property away, is another. The gift may be outside of your estate in 7 years, or just 2 years, or immediately. That depends on how clever your Inheritance Tax advisor is..

6: Not qualifying for Business Property Relief on your trading business

inheritance tax planning mistakes

The good news is, shares in your trading business may secure 100% Inheritance Tax relief on your death

The bad news is, HMRC will go through your last 3 years’ accounts with a fine tooth comb with the specific objective of trying to disqualify you, in whole or in part, where they believe there is a chance of them succeeding

You put your executors in that position, either because you chose not to plan ahead or, more likely, your advisory team didn’t have the level of competence required to properly plan on your behalf

Know this; your executors will run up against some of the most skilled Inspectors in the tax authority, and there are no exceptions.  A word to the wise – your executors will not win!

The most common failing is having investments, or too much cash, on your company balance sheet, likely because you didn’t want to extract it from the company because of the tax consequences of doing so

Another issue may be an inappropriate group structure which can reduce, or even eliminate Business Property Relief, and leave you family facing a 40% Inheritance Tax bill

7: Not dealing with the ‘ten year charge’ on Relevant Property Trusts

Relevant Property Trusts are used extensively in legacy planning as they are treated as a separate person in their own right for Inheritance Tax purposes

They provide the opportunity to shelter assets in a vehicle that’s outside your own estate

You can transfer assets equal in value to the Inheritance Tax nil-rate-band of £325,000 (£650,000 for married couples and for civil partners) into Relevant Property Trusts, every 7 years, free from Inheritance Tax, and that can be mighty valuable

These Trusts are subject to charges when assets leave the trust, and a maximum 6% at each ten year anniversary

Anniversary and exit charges are easily dealt with, if you know how. Otherwise, they have to be accounted for

8: Ignoring the interaction of Capital Gains Tax and Inheritance Tax

Property and shares are ‘chargeable assets’ for Capital Gains Tax (CGT) purposes. When you sell, a capital gain arises on the difference between sale and purchase price plus enhancements

That’s important to know because, if you gift a chargeable asset directly to a family member, you will be deemed to make a ‘disposal at market value’ for CGT purposes, even though you didn’t sell it, and you didn’t get paid for it

Maybe the perfect CGT strategy is to hold on to assets until you die, as your family inherit them at their then market value

The downside is your properties or shares are then subject to Inheritance Tax at 40%, on the full market value

You must focus on how your family preserves assets over generations, and that requires taking all taxes into account, not just Inheritance Tax

9: Not maximising ‘gifts out of income’

Gifts out of income

Gifts out of regular income are an exemption for Inheritance Tax purposes, which means that ‘qualifying gifts’ are outside of your estate, from day one

This is a most valuable exemption, but it is typically ignored by all but the most skilled of Inheritance Tax planners

In the right circumstances, and used properly, it may be possible to eliminate your family’s exposure to Inheritance Tax, over just a few years

While there are rules to be met, there is no 7 year clock running with this exemption, which makes it a very attractive proposition

10: Not keeping your Inheritance Tax planning up to date

The UK has one of the most complex tax structures in the world, with around 18,000 pages of tax laws, and nearly 1,000 tax reliefs and allowances. You can’t know them all. That’s a job for our team of Chartered Tax Advisors (CTA’s)

At outset, we ask you to visualise the future you want for your family legacy then, with the help of our team of CTA’s, you work back to today, using informed choices. Our CTA’s provide you with your legacy planning strategy, and all the tools you need to realise your vision

Once your Inheritance Tax planning is finalised, and paid for, you may be invited to become a full member of our Resource Optimisation Program (ROP) where our CTA’s will continue to work with you, to aim to maintain everything for you while you’re alive, and they’ll even handle probate for your beneficiaries when you die, and then work with your beneficiaries, if that’s what you want..

How’s that for peace of mind..

ROP provides you with 3 options: our CTA’s will implement, maintain and manage everything, or our CTA’s will work with your existing advisors, or you can do it all yourself. That’s ‘Done for you’, ‘Done with you’ or ‘Done by you’

Contact us HERE to talk to an expert, for FREE

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