DIY SOS – DIY tax planning rarely works
Many people will have heard of, or perhaps even know, people that have married their long term partner on their deathbed. There is good reason to do so, with married couples benefiting from generous Inheritance Tax (IHT) reliefs. But not all last minute tax planning works so effectively, and with HMRC taking an ever increasingly tough stance on tax avoidance, DIY measures may end up leaving your family with an even larger tax bill. Roz Wyeth explains why some of the more common steps rarely work.
Rising house prices have steadily pushed more and more people above the inheritance tax threshold. The Government has delivered on its long held promise to increase those thresholds, but there is always the temptation to take matters into your own hands and try and outwit the tax man. Some steps are sensible; others simply do not work.
Marrying on your deathbed
Married couples do benefit from generous IHT reliefs. At present, a single or a divorced person’s IHT allowance is £325,000 and a married couple or widow/widower has the potential for up to £650,000. It therefore makes sense for unmarried couples, particularly where one is terminally ill, to marry.
But, marrying without updating your Will may see your plans unravel – and it may even make matters worse, as marriage immediately revokes any previous Will unless that Will includes clauses stating that the Will is made in anticipation of the marriage. If you die without a valid Will your estate is classed as ‘intestate’, with your assets distributed in a fixed way as set out by law. It is not uncommon when an estate is intestate for the surviving spouse not to receive the share that perhaps parties intended, leaving everybody disappointed and frustrated.
So, by all means do marry on your deathbed, but make a new Will a lasting wedding present.
Giving away your home on your deathbed
For many, the family home is their most valuable asset, and it is surprisingly common to see the home given away shortly before death. It may be that the gift is made to allow the beneficiary to benefit from the home before probate is complete, and in the hope that it will avoid IHT.
It is entirely possible to give away your home, or indeed any other asset, but strict conditions must be met. All too often they are not, and, disappointingly, IHT is almost always payable.
The gift must be made when the donor believes death is imminent, and the donor must die. The donor must physically part with the gift and the gift must be capable of being given away. Importantly, the individual giving the asset away must have the mental capacity to do so and cannot be coerced in any way.
Any such gifts will continue to potentially attract a charge to IHT, as gifts made within seven years of death continue to fall into the estate.
Giving away assets, but still keeping them
It is still commonly believed that it is possible to give away your assets yet keep them for your own use – for example, giving jewellery or furniture to your children yet keeping them in your own home for you to use. Some also believe that it is possible to give away the family home, but continue to live there. This does not work for tax planning or nursing home fee mitigation, in the former it is a gift with reservation of benefit, and in the latter deprivation of assets.
You are subject to IHT on all the assets you own. If you give them away but continue to benefit from them HMRC will consider them as a gift with reservation and the value of them will be included as part of your estate for IHT.
Loans and cheques
Some of the more unusual steps we have seen taken include giving cheques to grandchildren to be cashed after death and the making and writing off of informal loans. Both, sadly, do not work.
The idea behind writing a cheque to be cashed after death is perhaps based on the desire to avoid having to wait for the probate process, giving grandchildren cash immediately.
However, it simply doesn’t work as the bank account of a deceased person is frozen, making it impossible to cash that cheque. Even if a cheque was given and cashed before death it would make no difference to any IHT payable.
The same applies to loans that are written off or ‘forgiven’. People mistakenly believe that such loans fall outside of IHT. Whilst technically that is possible, it must be supported by formal evidence by way of a witnessed deed. All too often these conditions cannot be met.
Writing your own Will
There are many ways to write a Will – with the help of your solicitor, a will-writer, even downloading a template from the internet. Many people mistakenly believe that it is expensive to consult a qualified professional and choose to write their own. As a result mistakes are made all too often, wording is misconstrued leaving your last wishes open to a challenge. In addition, tax implications are neither considered or understood resulting, potentially, to increased exposure to inheritance tax.
Wills are technical and complex legal documents and should be written by those that understand the process and can take the time to understand your estate and your wishes. They are not expensive; a Will written by our specialist team starts from as little as £195. Writing your own Will is a false economy, may leave your lasting legacy wrapped in a bitter dispute and lead to a hefty bill for your heirs.