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Inheritance tax: 4 common mistakes which could cost you thousands | Personal Finance | Finance

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As inheritance tax (IHT) receipts continue to rise, more families are being caught in the net. Principal Associate at national law firm Weightmans, Sally Cook spoke exclusively with on the most common tax mistakes she sees her clients making that can end up costing thousands. She explained there are four main areas that people often overlook when it comes to estate planning, which can lead to significant IHT issues down the line.

Ms Cook recommended people always seek professional support and guidance from a lawyer when it comes to each individual estate plan.

She stated: “This will give you the confidence that you’re avoiding potential pitfalls, and have plans that will deliver on what you want to happen to your money in the most tax-efficient way.”

Gifts with reservation of benefit
Ms Cook said: “One of the most common issues that can arise is where people make lifetime gifts of property and/or assets hoping to get value outside their estate for IHT purposes by surviving the date of the gift by seven years, but they either continue to benefit from or later benefit from that asset in the future.

“This is treated as a ‘gift with reservation of benefit’ by HMRC and the value can still be aggregated with the estate of the deceased even though they no longer own the asset.”

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She gave an example where parents gift a holiday or second home to their children but continue to use the property, rent-free. Simply, the fact that they’re still using the house without paying an open market rent means HMRC will treat them as having reserved a benefit in the property and the value will still be aggregated with their own estate if they die within seven years of the gift with reservation.

She continued: “Failure to observe the rules around retention of benefit can actually mean the asset can be ‘double taxed’. In the example above, if the children were to die while their parent or parents were alive, the value of the property would also be considered to be within the children’s estates for inheritance tax purposes as well as that of their parents.

“The bottom line here is that if you’re planning to give an asset away, you need to be very careful around how you use and interact with that asset going forward to make sure you do not fall foul of the IHT rules.”

Pre-owned assets tax (POAT)
She also mentioned cases where people try to give away certain types of assets – including land and personal possessions – to get the value of those assets out of their estate. However, these people are deemed to benefit, or be capable of benefitting from, those assets, and need to pay income tax as a result.


In her example, Ms Cook said: “Say Person A made a gift of £350,000 in cash to Person B, and Person B then used the cash to buy a house. If Person A then moved into that property – and lived there rent-free – they will be subject to what’s known as ‘pre-owned assets tax’ from the moment they move in. The tax is charged against the income they would have otherwise received if they’d rented out the property at market rate in the first place.

“Again, you need to be very careful about how you interact with money or assets that you give away. The rules on POAT are complex and it is important that you seek advice from a qualified professional to avoid an unintended tax liability”.

Deeds of Variation

Deeds of Variation are “often overlooked” within general estate planning even though they are an efficient way of getting a significant value out of an estate for IHT purposes, she explained.

It is possible for someone who has benefited under a deceased’s will or intestacy to re-direct all or part of that inheritance to any person or people they choose. If this is done by formal deed within the relevant timescales (within two years of the deceased’s death), there is no requirement for the donor of the gift to survive by seven years for that gift to be outside their own estate for IHT purposes.

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She added: “The problem is that people forget to complete the required paperwork before it’s too late. If you know this is something you want to do, it’s important to do it before you make the gift, within two years of death and to make sure that it is done by formal deed which contains the relevant declarations for inheritance tax and capital gains tax .”

The ’14-year shadow’
Many people will be aware of the ‘seven-year rule’ for IHT – IHT is not payable on an outright gift to an individual or individuals if the donor has not reserved a benefit in the asset gifted away and survives seven years from making the gift .

However, many people are unaware of what is known as the ’14-year shadow’. This is relevant when a deceased has made ‘chargeable lifetime transfers’ as well as outright gifts to individuals. This can be seen in the example, below.

Ms Cook explained that if someone wants to gift £150,000 to their family, but still wishes to control how and when it’s used, they may decide to put it into a trust.

This would be a chargeable lifetime transfer for IHT purposes. Six years later, they decide to give away a further £300,000, but they don’t put it into a trust – they give it directly in cash this time. Four years after that, they die.

Ms Cook said: “When it comes to calculating IHT, the cash gift that they gave was within seven years of their death, so the value of that gift is still within the deceased’s estate even though the asset was given away four years prior to death .

“Each individual in England and Wales has a ‘nil-rate band’, which is effectively an amount they’re allowed to give away, whenever and however they want, tax-free. If the cumulative total of all gifts made within seven years of their death is less than or equal to this amount, there’s still no tax to pay.”

The standard nil rate band for 2022/23 is £325,000 for a single person. To calculate how much of the nil rate band is available to offset against all gifts made in the seven years before death, people first need to subtract the value of any ‘chargeable lifetime transfers’ made within seven years of the earliest failed cash gift.

In Ms Cook’s example above, the £150,000 that was put into trust reduces the nil rate band from £325,000 to £175,000, which does not cover the £300,000 that was gifted in cash. The beneficiary of that failed cash gift will be personally liable to IHT at 40 percent of £125,000, which is a whopping £50,000.

She concluded: “This illustrates just how complex this planning can be, and the importance of ensuring that you have taken advice about how the interaction between different types of lifetime gifts could affect the tax position. Taking professional advice from a lawyer here is key. They can help you understand.”