Common Misconceptions About Inheritance Tax and Trusts: Debunking Myths and Clarifying Facts

Inheritance tax and trusts are topics that often generate confusion and misunderstandings among individuals. As financial advisors, it is our responsibility at Hysons Chartered Accountants to shed light on these subjects and debunk some of the common misconceptions surrounding them. By clarifying the facts, we aim to provide a better understanding of inheritance tax and trusts, enabling individuals to make informed decisions when it comes to estate planning.

Myth 1: Inheritance Tax Only Affects the Wealthy

One prevailing misconception about inheritance tax is that it only affects the wealthy or those with substantial assets. While it is true that inheritance tax primarily targets estates of higher value, it can potentially impact anyone with assets exceeding the tax threshold. The inheritance tax threshold varies by country, so it is crucial to consult local laws and regulations to determine the applicable threshold in your jurisdiction. However, for UK residents, this is currently frozen at £325K until 2028.

Myth 2: Gifting Assets Before Death can Completely Avoid Inheritance Tax

Another commonly misunderstood concept is that gifting assets to loved ones before death can entirely circumvent inheritance tax. In many jurisdictions, there are rules and limitations in place to prevent individuals from purposefully reducing their estates to avoid tax. These rules often include a “seven-year rule” or “gifts with reservation of benefit,” which means that gifts made within a certain timeframe of the individual’s death may still be subject to inheritance tax. Seeking professional advice before making significant gifts can help ensure compliance with relevant regulations.

Myth 3: Setting up a Trust Eliminates all Inheritance Tax Liabilities

Trusts can be valuable tools for estate planning and can help mitigate inheritance tax liabilities in certain situations. However, it is essential to understand that not all trusts are created equally, and their effectiveness in reducing tax liabilities depends on various factors. Different types of trusts exist, such as discretionary trusts, bare trusts, and life interest trusts, each with its own rules and tax implications. Consulting with a qualified professional who specialises in trusts can help determine the most suitable trust structure for your specific circumstances.

Myth 4: Trusts are Only for the Wealthy

Trusts are often associated with the wealthy due to their historical use by affluent families to pass down wealth across generations. However, trusts can be beneficial for individuals from various financial backgrounds. They can serve a range of purposes, such as protecting assets, providing for vulnerable family members, and ensuring efficient estate administration. Trusts can be especially valuable for those who wish to control how their assets are distributed and want to minimise inheritance tax liabilities.

Myth 5: Once Assets are Placed in a Trust, They Cannot be Accessed or Changed

Many people believe that once assets are placed in a trust, they become untouchable and irrevocable. However, depending on the type of trust, certain provisions can be made to allow flexibility and access to the assets. For example, in a discretionary trust, the trustees have the power to distribute income or assets to the beneficiaries as they see fit. Additionally, some trusts offer the option to make amendments or change beneficiaries over time. Understanding the different types of trusts and their provisions is crucial to ensure they align with your specific needs and objectives.

Hysons Are Here to Help with Your Trust Accounting Needs

Inheritance tax and trusts are complex subjects that require careful consideration and professional guidance, however can be a valuable asset when set up correctly. By dispelling common misconceptions and clarifying the facts surrounding these topics, we hope to empower individuals to make informed decisions about their estate planning.

At Hysons Chartered Accountants, we have a team of experts ready to assist you in navigating the intricacies of inheritance tax and trusts, ensuring that your assets are protected, and your wishes are carried out efficiently.

To find out how you could benefit from our trust accounting services, contact Hysons and book a free accounting consultation.