Feeling Generous?...
The Figures
Inheritance tax (IHT) accounts for only around 1% of HMRC’s tax take but, nevertheless, it can be quite an emotive subject because it impacts on the people we love.
Latest figures show HMRC’s IHT receipts rose from £5.3bn in 2020 / 2121 to £6.1bn in 2021 / 2022. This increase is only partly explained by Covid-related deaths.
The other explanation comes from the fact that the nil rate band (NRB) has been frozen until 2026. The NRB is the amount we’re allowed to die with BEFORE our estate has to pay IHT. This NRB freeze, combined with rising house prices, is pushing more families into the scope of IHT.
The good news is that a bit of relatively simple planning can save a significant amount of IHT simply by gifting your money or assets:
If you don’t need it, give it away! The most straightforward form of IHT planning is giving your money away. 40% of your estate goes to HMRC (after NRBs) but if your intention is to pass your assets to the next generation, it might be worth consider taking this step during your lifetime.
As with everything, it’s not 100% straightforward and here’s some things you need to bear in mind. I also fully understand that you might be reluctant to gift money if you’re concerned about later-life care (or whom your children have married!). That’s understandable but it’s probably still worth knowing your options.
7-Year Rule
If you give away an asset, you need to survive 7 years for the gift to be fully exempt from IHT. Surviving 3 to 7 years will reduce the IHT due on the gift.
The gift is called a potentially exempt transfer (PET). A PET is said to fail if the person making the gift dies within 7 years, resulting in IHT being due on the gift.
The Gift Must Be ‘Absolute’
If you give away an asset but still retain a benefit from the gift, this could be a problem. Such gifts are referred to as ‘gifts with reservation’.
The classic example is giving an expensive painting to one of the kids but keeping it in your home so you can continue to ‘enjoy’ it. Have you REALLY given it away? HMRC says no.
Keep Good Records
Ensure good records are kept so executors or personal representatives can identify the gifts. On death, it will be the executors who must provide details of any gifts to HMRC.
An absence of information can result in additional tax being paid. Keeping records doesn’t have to be onerous, but there should be sufficient information to evidence the timing and nature of the gifts.
Other Taxes Might Apply
If an asset is given away that would have otherwise triggered capital gains (CGT) tax if sold, for example a holiday home, then it’s likely that CGT will be payable at the time of the gift.
In the eyes of HMRC, if you give something away, you owe tax as if you’ve sold the asset at market value despite receiving no cash.
As well as CGT, in certain instances stamp duty land tax might also be due if a property is involved. Although certain exemptions are available here, these exemptions are largely reserved for assets that would have been outside the scope of IHT in any case.
Gifts Under a Power of Attorney
People acting under a power of attorney might make gifts in limited circumstances. If the power of attorney is silent on the attorney’s power to make a gift, the attorney may only make a gift on a ‘customary occasion’ such as a birthday, wedding or anniversary.
It’s also essential that the attorney is sure the donor can afford the gift. This means that even if the person on behalf of whom the gift is made frequently made gifts while they retained the capacity to do so, the attorney must check that the donor’s estate is big enough to justify similar gifts being made in future.
The Office of the Public Guardian has the power to investigate instances of attorneys making gifts the donor cannot afford so the attorney should always make sure they can justify any gifts made.
A Couple of Myths
It’s interesting, when I speak to people, how they understand IHT. There are a couple of common misconceptions which I thought I’d clarify.
My house is exempt from IHT: Wrong! While the main home is usually exempt from CGT on sale, the value of your home forms part of your death estate. The residence nil rate band is available to reduce the IHT payable on your main home, but any value in excess of the available nil rate bands will be subject to IHT.
ISAs aren’t included: Wrong! The value of an ISA forms part of the death estate and is therefore potentially subject to IHT. The income and gains arising on an ISA up until the estate ceases or 3 years have passed since the death continue to be tax free. If your spouse or civil partner dies, the surviving spouse can inherit their ISA allowance, up to the value of the ISA when they died or when it’s closed (whichever is higher). This is a widely underused provision.
Is It Worth it Then?
There are a few things that tend to make gifting worth it or not:
How you feel about IHT.
How concerned you are able needing money in the future for care.
What you think of the partners of your children (do you want your money to potentially ‘leave’ the family if they split up)?
Only you can decide but I hope what I’ve written has been useful and easy to follow. If anything doesn’t make sense, please tell me.
Until next time…