IT’S not too often we wake up thinking ‘today’s a belting day to plan my death duties’. Yet every year, families are blindsided by the bureaucratic mess and tax bill which can follow a loved one’s passing on top of the trauma of loss.
There’s one thing Inheritance Tax (IHT), let alone life, teaches us, it’s that what you don’t know can cost you a fortune.
Take the very interesting case of Mr and Mrs Daffodil (yes, it’s the real name). A pair of homeowners who, like many, didn’t quite get around to sorting the legal stuff. They owned their bungalow as tenants in common – not the usual “what’s mine is yours” joint tenancy. When Mr Daffodil died, he didn’t have a will. Mrs Daffodil, entitled to the estate, didn’t apply for letters of administration. She just kept on living there, quietly, for another six years.
When she died however, the taxman came calling – not just for her share, but also for the right she could have exercised to inherit her late husband’s estate. Why? Under Inheritance tax law, it’s not just the assets you have, it’s the rights, options, and entitlements you hold that matter. That “could’ve, should’ve, would’ve” counted, and the taxman deemed it part of her estate.
It’s a stark reminder: if your partner dies and leaves half a house in legal limbo, that “right” still has real value. If it’s not sorted out, it’ll still show up in the Inheritance tax calculations like a politician at a dinner party – unexpected, unwelcome, and hard to argue with.
When someone dies, their estate isn’t just what’s in the bank and the attic. It includes: everything they owned outright; their share in jointly owned property (yes, even joint tenants); life interests in trusts and any gifts they made where they kept using the asset (the good old classic “give the house to the kids but live in it rent-free” scenario).
Then there’s the seven-year rule. If you give something away and live seven years, you dodge the inheritance tax. Die within that window, and it could be clawed back unless the asset’s value dropped significantly, in which case, relief may be available.
To coin a phrase, ‘there’s more’. HMRC can even look at how much less an asset is worth at your death compared to when you gifted it. That two per cent stake in a
family company might not be worth much on paper, but the loss of control from gifting it can mean the value for Inheritance tax is inflated – unless the donee can prove otherwise.
The relief that’s often forgotten: If property is sold after someone dies and it turns out you overpaid Inheritance tax because the market value fell there’s some relief available. But it comes with fine print longer than a mobile phone contract: Sale must happen within three years; the buyer must be unconnected; no repurchases allowed (yes, even if you really liked the wallpaper a whole lot).
And then there’s the old faithful: quoted shares. Sell them within 12 months, and if they’ve dropped in value, you might be able to claim relief. But beware – all such shares in the estate must be revalued, not just the ones that dipped.
This is a bit techy but your solicitor will be able to help if it applies:
Quick succession relief: because lightning sometimes strikes twice.
If Susan inherits from Alan and dies two years later, quick succession relief helps soften the blow. It reduces the Inheritance tax Susan’s estate pays on what she inherited, acknowledging that the same asset is being taxed twice in quick succession. Handy enough, but often missed.
In Inheritance tax land, it’s not just what you leave behind, it’s what you could have done which counts. A statutory right you never exercised? That’s still taxable. A property you forgot to gift properly? The taxman remembers.
Get your house in order – literally and figuratively. Review how your property is owned. Have a valid will. Use trusts properly. And don’t let a bungalow ‘bloom into a tax trap’.
Talk to a qualified independent financial adviser and your solicitor who understands not just the law, but the emotional reality of what families go through. You’ve worked hard for what you have. Make sure it ends up where you want it to.
If you have an inheritance tax query, please call 01872 222422 or email info@wwfp.net
Peter McGahan is the Chief Executive Officer of independent financial advisers Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.