Recent press reports have focused on an Inheritance Tax (IHT) snare we commonly see arising in our practice; one which is costing individuals who have not taken adequate advice many millions of pounds each year.
The IHT rules are a little unwieldly and are often misunderstood but many taxpayers are aware of the benefits that lifetime gifts bring. The issue here relates to the way in which gifts made during the course of an individual’s lifetime are taxed. If there’s IHT to pay, it’s charged at 40% on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale. Gifts made more than seven years before death fall outside the scope of the tax – or at least that is the broad idea.
The problem is that if a person makes a gift of assets but continues to benefit from the assets which are the subject of the gift, then the value of their estate may not be reduced for IHT purposes and the gift does not work in the way they anticipated. The assets are treated as “gifts with reservation of benefit” in tax speak. We commonly see the issue where homes which have been “gifted” to children but continue to be lived in rent free by the parent(s). This is an obvious illustration of the point but there are many situations where these rules will need to be carefully considered
Close to 2000 people making £624m of “gifts” have unwittingly fallen into this trap since 2016. All this comes against the backdrop of a gradual increase in the IHT tax take – rising to £5.38bn in 2020/21. That is £200m more than the previous year.
If you are considering your exposure to IHT and think you may need advice then we provide a full private client advisory and compliance service, covering all aspects of tax planning. Please do not hesitate to contact us to discuss any aspect of your own personal tax position and how we can assist you.