Inheritance tax: Three things you should NOT do if you inherit money

Graham Southorn shares inheritance tax tips

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Inheritance tax is set at 40 percent and is paid on someone’s property, money, possessions and savings when they die. The latest figures from HM Revenue and Customs (HMRC) show that record high IHT receipts were collected in June, as more and more people were forced to pay inheritance tax because of increasing property prices. However, there are three things people shouldn’t do when they inherit money.

Inheritance tax can seem like a confusing topic, so it pays to brush up on the rules and make use of all tax breaks available.

The threshold at which people have to pay inheritance tax has remained at £325,000 for years, meaning more people have to pay it every year because of soaring property prices.

However, not everyone has to pay inheritance tax on assets above £325,000 as there are some exceptions to the rules depending on if it’s a property being passed to children and if the deceased was part of a couple.

Inheriting money can be exciting but it’s important that people don’t make one of three typical mistakes.

Three things people shouldn’t do when they inherit money:

Spend it before they get it – Experts say it could take several years or even decades for people to legally receive their inheritance.

Take it for granted – The will can still be contested and it’s not unusual for family members who are left out of the will to do this.

Forget about paying inheritance tax – Depending on the size of the estate it could add up to a significant chunk.

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Making one of the above mistakes could land some people in hot water with HMRC and lead to financial difficulties further down the line.

Meanwhile, people who are considering reducing the inheritance tax bill for loved ones should make use of loopholes in order to leave them with less tax to pay.

Jenny Holt, managing director for customer savings, and investments at Standard Life said get it wrong and it will reduce the full benefit of your gift.

She said: “There are many tax-efficient ways you can support your loved ones and being well-informed about the options for your family’s circumstances will put you in the best position to make the most of your money, and their future.”

Ms Holt added: “However, it is a complex area, so it’s well worth seeking financial advice for your situation.”

The savings expert recently outlined how much money grandparents can give to grandchildren tax free. 

Standard Life’s Jenny Holt shared tips for gifting to children or grandchildren tax-free.

Ms Holt shared tips for gifting to children or grandchildren tax-free:

Give regularly

“You can gift up to £3,000 to anyone in a tax year, and gift £250 to as many people as you want without paying any inheritance tax (IHT).

“This can be carried forward one year but if you don’t use it then, you will lose it. So, giving money to your loved ones regularly can be an effective way to minimise the IHT payable on your estate on your death.”

Pay into their ISA

“You can open a Junior ISA (JISA) for your child or save into one on your grandchild’s behalf. Currently, you can pay up to £9,000 in total in a tax year into a JISA and that money can be invested, which gives a chance for their savings to increase over time.

“They can access the money when they reach the age of 18 and they won’t pay any tax on anything they withdraw or pay Capital Gains Tax on any investment growth either.

“There’s also the option to support their Lifetime ISA – which can be opened by anyone between the age of 18 and 39 and could help them save for a property or boost their pension savings.”

Think about the benefits of using a trust

“Using a trust allows you to support your grandchildren while you’re still around, as well as offering a number of tax advantages. As a trustee, you retain an element of control over the funds and how and when they’re paid, while gifts made to the trust can reduce your estate for IHT.

“Using a discretionary trust gives grandparents the greatest flexibility and control, but the taxation is higher and more complex. You should seek Financial Advice if you are considering using a trust to help you select the right option for your circumstances.”

Give larger gifts… but be aware of the seven-year rule

“If you want to gift larger sums to individuals, these won’t be counted for IHT purposes if you live for seven years afterwards.

“If you don’t live for the full seven years, the money you’ve given will be added to the value of your estate, eating into your £325,000 threshold.

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