Inheritance Tax: Beware ‘double whammy’ tax & rules which may cost £130,000 if not heeded

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Inheritance tax is payable on the estate – money, possessions and property – of a person who has passed away and is taxed at 40 percent above a particular threshold. For many people, an estate also includes their home, and they will wish to consider this when thinking about the value of their estate. But the process of dealing with IHT is not always as simple as it may appear on a surface level, and thus taking caution is important. spoke to Elaine Roche, Director of Solicitors for the Elderly and Partner at law firm, Kuits, who provided insight into some of the complexities which can arise when thinking about Inheritance Tax.

These difficulties can understandably ensue when it comes to property – often the highest value asset a person holds.

Ms Roche warned that due to complex issues arising often, it is often difficult to take on the burden of understanding tax implications alone.

She said: “We often see people give away their house but continue to live in it and think it has protected them from Inheritance Tax.

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“However, that is not the case at all and could have consequences.

“HMRC says if you give something away, but still continue to treat it as if it is yours – for example, not paying rent, then for all intents and purposes, you will be taxed as if you own it, even if you gave it away 20 years ago.

“Actually, this will be a ‘double whammy’ because not only is there Inheritance Tax to think of in this respect, but there will also be a Capital Gains Tax bill to meet.

“It is always a nightmare when a client comes to us with this kind of information, thinking they have done the right thing.”

As Ms Roche highlighted, there are specific rules to consider when it comes to passing on a home.

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If a person moves out of their home and lives for another seven years, there is usually no Inheritance Tax to pay.

But there are strict rules on continuing to live in a property after it is given away.

Rent must be paid to the new owner at the going rate for similar local rental properties, a person must pay their share of the bills, and must also live in the property for at least seven years, the government has explained.

Many people are unaware of such rules and their loved ones may be in for a nasty shock when it comes to a tax bill later down the line.

Ms Roche acknowledged people’s motivations to take such action are often varied.

Some will do so for tax planning purposes, but others have worries about their care fees, and who will look after them should they become unwell.

But acting quickly, rather than in a slow and considered manner can cause problems with taxes to spiral out of control.

Ms Roche continued: “Failure to understand Inheritance Tax can trap people into really nasty surprises later down the line when it comes to a bill. It isn’t a straightforward issue. 

“You can see one thing, and take action to combat that, but not realise about the consequences this action might have on other parts of your estate.

“People may wish to plan for care fees and put their property into a trust, but this can cause problems when the person eventually dies.”

Trusts can be complex, but some will use these to legally shelter their funds from an Inheritance Tax bill.

While some trusts are subject to IHT, others will no longer be subject to the levy on a person’s death.

However, Ms Roche offered a caution when it comes to this kind of move if planning ahead of time.

She warned Britons they would need to act very carefully to avoid an astronomical tax bill when it comes to the residence nil rate band.

The residence nil rate band will be of particular importance to individuals who die with an estate worth more than the basic IHT threshold.

It is an extra property allowance helping people to leave their homes to family tax-free, but this must be to a direct descendant.

Only certain people will qualify, but the nil-rate band can provide significant relief if needed.

Ms Roche said: “Depending on how a trust is carried out, if a person chooses this action, they may not be able to get the residence nil rate band for the property.

“I’ve certainly seen will writers implement a trust, and without realising have removed the estate’s right to the residence nil rate band.

“This is a mistake which could potentially be very costly, to the tune of up to £130,000 in tax, as a sting in the tail when a person passes away.”

As a result, Ms Roche concluded by stressing Britons should always take advice when thinking about Inheritance Tax.

This, she said, should be from qualified, and indeed specialised solicitors who will be able to provide further, in-depth insight into a person’s affairs.

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