Inheritance Tax (IHT) is a tax paid on your estate after you have died. (Just by way of clarification, the word ‘estate’ means everything you own when you die, which could be a house, a holiday property, a buy to let property, investments, shares, premium bonds). It is a concern for many people who want to ensure their loved ones receive maximum benefit from any inheritance. IHT rules are complicated but with careful planning, tax liabilities can be lessened.
Gifting is often an easy step that can be taken to mitigate IHT. The rules depend on the type of gift you make.
At the moment each individual can gift £3,000 in each tax year without any IHT implications. Kindly note, this is £3,000 in total and not £3,000 per recipient. You can also make smaller gifts of up to £250 to anyone who has not received any other gift from you.
Gifts that exceed the sum of £3,000 annually are known as potentially exempt transfers. If you survive for seven years from the date you made the gift then your estate will probably not need to pay any IHT on it. If you die within the seven-year period, the value is brought back into your estate for the purposes of calculating any IHT that needs to be paid.
Careful consideration needs to be given when making any gift. It may be necessary to update your Will and there might be other consequences, such as loss of income for yourself, loss of use and enjoyment of your assets, as you have gifted them. It is also important to consider any Capital Gains Tax liability if the gift is something other than cash.
It is also possible to give gifts of unlimited amounts out of surplus income. ‘Surplus income’ means any “spare” income that you have after you have paid your normal expenditure. If this criteria is met then the gifting will not have any IHT consequences at the time of your death and there is no limit on the amount that can be gifted.
It is important to note, however, that there must be a regular pattern of payments out of surplus income, for instance this must be on a monthly, quarterly or annual basis, even though the amount does not need to be the same on each occasion, as long as the gifting becomes part of your normal expenditure. It is also advisable to keep very careful records of gifting out of surplus income as your executors (the people who carry out the administration of your estate after death and who are responsible for preparing any necessary reports or statements to the Inland Revenue following your death) will need to be able to provide evidence of the gifting out of surplus income to HMRC.
Many people also consider making a gift of their home to children. There may be many and various reasons why an individual may consider this to be a solution but it is rarely something that a solicitor would recommend or that it would achieve the purpose for which the gift was made. For example, if there is a gift of your home but an individual continues to live in it, and the purpose of gifting the home to other family members is to reduce the value of the estate for IHT purposes, then the scheme will not work. It would be caught by the ‘gift with reservation of benefit’ rules which means that, regardless of whether you live for seven years after making the gift, the full value of your home is still included within the value of your estate when calculating IHT at the time of your death.
The only way to avoid getting caught by the gift with reservation of benefit rules would be to pay a full market rent for your occupation of the property. However, the rent will then be income for the recipient of the gift and subject to income tax. There are other risks to gifting your property:-
- Your home would be owned by the recipient and they could potentially sell the property, raise a mortgage against it, move in or have a lodger;
- If the recipient were to get divorced or have financial difficulties, your home would be their asset and subject to claims from spouses and creditors;
- If the recipient does not live in the property, then any increase in value will be subject to Capital Gains Tax;
- If the recipient does not own their own home but later wishes to buy somewhere, they will have to pay higher rates of stamp duty;
- If you need care in the future and require local authority funding, the local authority might argue that you have deprived yourself of assets and still include the value of your property in your estate for any financial assessment.
Before undertaking any IHT planning you should always seek advice from someone who is appropriately qualified like a Solicitor For the Elderly.
Every individual’s circumstances are unique and should be considered and advised upon on a case-by-case basis. It might also be necessary to include a financial adviser in any discussions and deliberations, who can work with you and your solicitor to achieve the desired result. We at Martyn Prowel Solicitors can certainly assist and if you would like to make contact with us, please do not hesitate to ring us on 02920 470909 and speak to Natalie Harvey.