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  • Inheritance tax: lifetime gifts and the Inheritance Tax trap

    14 October 2018

    Andy Wood

    Inheritance tax: lifetime gifts and the Inheritance Tax trap

    For most people, an increase in the value of the home they own gives them something of a warm, fuzzy glow.

    It means that they’re worth a little more and will have a little extra cash or other assets to pass on to their family and friends when they pass away.

    However, in recent years, an increasing proportion of the population has had cause to consider property prices with anxiety.

    If they’re not wondering whether they’ll ever take their first steps onto the housing ladder, they’re pondering how much Inheritance Tax (IHT) their estate might be liable for.

    Even though prevailing uncertainty has seen the housing market cool slightly of late, properties in England still rose by 2.9 per cent over the course of the last year, making the average home worth £243,583, according to statistics released in July by the Land Registry.

    That may seem comfortably beneath the current IHT threshold – or, ‘Nil Rate Band’, as it’s known – of £325,000. In the absence of any reliefs, anything in excess of that figure is taxed at 40 per cent.

    Consider, though, the predicament of people living in London, where the average price paid by first-time buyers completing a house purchase in May was £418,735.

    Nevertheless, the effects of increasing prices are not only felt by those living within the M25.

    Data released by HMRC this summer showed that an ever greater number of families is having to pay IHT.

    The total receipts for the ‘Death Tax’ also reached new heights during the last financial year with £5.2 billion into the Treasury’s coffers – an increase of eight per cent or £388 million in the space of a single year.

    Against that backdrop, it’s not surprising to hear how people are doing what they can to avoid the Inheritance Tax ‘trap’.

    New research suggests that one-fifth of parents are making gifts to their children in an attempt to keep the value of their estates at the times of their death inside the ‘Nil Rate Band’.

    The study calculated that some £227 billion had been given away with beneficiaries receiving an average sum of more than £32,000.

    Even so, it’s worth pointing out that gifting is not a friction-free way to avoid IHT.

    The Revenue is alive to the potential for people whose personal wealth exceeds the IHT threshold to simply give away enough of what they have before they die in order to avoid a posthumous contribution to the Treasury.

    There are rules about what, to whom and how much individuals can gift, how regularly they can do so and even how far in advance of their own death they can without triggering an IHT bill for the recipient.

    Sums of the order being discussed in this latest research might still come with an IHT demand attached.

    Let’s not forget either that what I’ve set out is the current situation.

    Things might become even more complicated if economists and politicians like Sir Vince Cable, the former ‘Strictly Come Dancing’ contestant and current Liberal Democrat leader, has his way.

    During the course of his party’s recent annual conference, he outlined an intention to scrap IHT altogether and replace it with a wealth tax worked out on the basis of gifts made across the course of someone’s lifetime.

    Although making gifts is a simple way of reducing one’s estate for IHT purposes assuming one does not need the asset and also survive the donation by seven years.

    Of course, people doing so don’t know how long they’ll live.

    Where one does die within the seven year period then the value of ‘failed’ gift is added back to the estate and the IHT is calculated on this increased amount. If one dies between 3 and 7 years of making the gift then the tax payable is reduced by taper relief.

    As such, it makes sense to explore other options by seeking the guidance of an experienced professional who can put in place a plan that meets you and your family’s circumstances and objectives.

    The alternative is a warm glow not born of comfort but consternation and a hefty demand from HMRC.


    If you have any queries about Inheritance Tax and how to protect your estate then please get in touch