Britons ‘throwing away thousands’ via simple inheritance tax mistakes

Inheritance tax: Financial advisor provides advice

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IHT is the common tax levied on someone’s estate after they have died, which can include their money, possessions and property. No IHT is paid if the value of your estate is below the £325,000 threshold or if the person leaves everything above the £325,000 threshold to their spouse, civil partner or a charity.

Generally, any excess over the nil-rate band (currently £325,000) is chargeable to inheritance tax at 40 percent, less any lifetime inheritance tax paid on transfers.

Faye Smith, financial planner from Reeves Independent spoke exclusively with about the common mistakes people make when IHT planning and how people can avoid them.

1. Failing to plan
She said: “It seems obvious, but this is where it all begins. If you don’t plan for the fallout of IHT in advance you could be throwing away thousands of pounds that could have otherwise benefited your beneficiaries. It’s never too early to start planning.

“Not having any estate plan at all is the most common mistake. 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 on, being taken away in tax.

2. No Will

Research from Canada Life in 2020 showed that 60 percent of over 45s in the UK don’t have a Will. This is the most basic estate planning tool and everyone should have one, she explained.

Dying intestate – without a will – is not ideal.

She continued: “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.

“Also, when drawing up the will, consider appointing a power of attorney, so that somebody can handle your affairs, including your finances, if you should become incapacitated.”

Ms Smith said: “If you make a gift of more than £3,000 and then you 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.”

Britons should seek financial advice if they are looking for the best ways to save money.

By speaking with a financial advisor, people can save thousands.

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