Christopher McNeill looks at some common tax misconceptions

The revenue raised from Inheritance Tax (IHT) has dropped for the first time in ten years. This owes more to the introduction of new tax reliefs, like the Residential Nil Rate Band, or the reduced tax rate payable where a will includes sufficient charitable gifts, than to any efficient planning on the part of the tax payer.

What can help on the planning side is to avoid some basic misconceptions.

1. Inaccurate will drafting; see here
2. Common law marriage. There is no such thing (in English law) as a common law marriage; the “spouse” is in no better tax position than any other unmarried partner and any gift to them will be taxed in full
3. Assuming that pre-marriage gifts to a spouse (other than the exempt wedding gift of £1,000) are exempted by the subsequent marriage
4. Assuming that gifts to a spouse are exempt regardless of his or her domicile. If the tax payer is UK domiciled then the spouse must be too, or there is only limited exemption related to the Nil Rate Band (NRB) at the time
5. Putting your own home “in the children’s names” and continuing to live there rent free
6. Validly giving equity in your own home to a child who is a joint occupier with you but the child assumes liability for all outgoings; the gift, which would otherwise have been tax effective, then falls foul of the Gift With Reservation rules
7. Failing to include lifetime gifts in the charge to tax – which may be more dangerous for your executors than for you if they were not even aware of the gifts but still find themselves liable to pay the tax. Outright gifts drop out of account after seven years, conditional gifts or gifts into trust usually do not.
8. Assuming that if foreign (non-UK) assets are subject to foreign tax they are not also subject to IHT
9. Applying the “tax taper” to the value of lifetime gifts which actually fall within the Nil Rate Band and are not taxable anyway. The value of the lifetime gift is NOT discounted over time in the same way as the tax itself and will use up just as much of the NRB on death
10. Thinking that the Transferrable Nil Rate Band (TNRB) covers lifetime gifts by the surviving spouse
11. Using the TNRB to set up a will trust and thinking the trust will continue to have a TNRB as well as its own basic rate NRB

The other side of the coin is failing to research and use all the available reliefs, as set out in the Inheritance Act 1984 (“the Act”) and including the reduced tax rate for wills and other reliefs mentioned above, also gifts that are not actually treated as gifts since they confer no gratuitous benefit (section 10 ibid.) or they amount to provision for family maintenance (section 11 ibid.)

One of the provisions most commonly neglected is the exception in section 21 of the Act for “normal expenditure out of income”, described in more detail here.

HMRC is not keen on the widespread application of this provision and attempts to cut its scope down wherever possible. Nevertheless, this Section of the Act is clear enough to offer a valuable relief from IHT and, as long as it is implemented properly, can make a practical, and surprisingly substantial, contribution to the annual gifts the tax payer may already make using other exemptions.