Gifts and Inheritance Tax
What qualifies as a gift for Inheritance Tax?
It is perhaps easier to say what isn’t a gift for Inheritance Tax purposes – it is not a gift when absolute use and ownership of whatever is gifted does not pass to the Donee (the person receiving the gift) by the Donor (the person making the gift).
The most common examples of this include such things as transferring ownership of your home to your children whilst continuing to live there rent free or giving cash to children, but qualifying it with a “give it back to me if I ever need it” clause. In Inheritance Tax speak, these are known as “Gifts with Reservation of Benefit” and are taken into account when it comes to assessing your final estate.
So it stands to reason that anything that the Donor permanently gives without reservation for any current or future use of an asset constitutes as a gift for Inheritance Tax purposes.
Are inheritance gifts a good way to avoid Inheritance Tax?
In a word, yes! However, are you absolutely certain you can afford to make the gift in the first place? Have you enough income and other financial resources to maintain your standard of living throughout your retirement, come what may, even for future long-term care, for example? If so, gifts are a great way to reduce a future Inheritance Tax liability.
If you can demonstrate that you can afford an annual inheritance gift, not exceeding £3,000 and regular payments out of your income, for example, they will not be included. Larger gifts, not covered by an Allowance or Exemption are generally known as “Potentially Exempt Transfers (PETs)”, which fall out of the Inheritance Tax net after 7 years. There is no tax to pay by either Donor or Donee at the time of the gift, but the Donee may well have an Inheritance Tax liability upon the death of the Donor, if they die within 7 years.
One point that is worth remembering is that the value of the gift is what the asset was worth at the date of the inheritance gift not what it may be worth upon the death of the Donor. So, for example, land given away at agricultural value, called agricultural relief, which subsequently gains planning permission, stays at the original value. So, even if the Donor dies within 7 years, considerable financial benefit may still be gained from the gift as it is only the value at the date of gift that is taken into account.
How else can I reduce inheritance tax?
Many people have heard of something called “Taper Relief” in connection with Inheritance Tax and gifts, but don’t understand the rules. If the gift exceeds the current Nil Rate Band (£325,000 in 2023/24) then Taper Relief will apply in the event of the Donor dying within 7 years.
However, if the gift was less than the current Nil Rate Band, which most probably will be, the full value of the gift is added back to calculate the overall rate of Inheritance Tax. When Taper Relief does apply, the full value of the gift is still added back if death occurs during the first 7 years, but the amount of tax payable by the Donee is tapered 40% in years 1-3; 32% in years 3-4; 24% in years 4-5; 16% in years 5-6 and 8% in years 6-7.
Remember, if Inheritance Tax does become payable on a PET, it is the Donee that has to pay the tax. This can be something of an embarrassment if the gift has been invested in their home or, worse still, spent! If it is not realistic to keep a reserve equivalent to the potential tax due of 40% of the gift, after any allowances, it may be worth taking out suitable insurance on the life of the Donor.
If you believe you have an Inheritance Tax problem and want to know what legitimate steps you can take to mitigate this, contact me today, or complete the form below.
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0800 074 8755info@clivebarwell.co.uk