25 April 2023
Personal Tax Planning,
Wealth planning & Private client
As Benjamin Franklin famously said nothing is certain except for death and taxes. And with the recent Spring Budget bringing another Inheritance Tax (IHT) threshold freeze, more people than ever before could be looking towards lifetime gifting as a way to counterbalance additional IHT charges.
Whilst this is a legitimately effective tool for IHT planning, only recently it was announced that HMRC have clawed back over £700 million from families who were in breach of complex gifting rules. This hefty sum accounted for over 2,000 families, some of which may not have access to married couples’ privileges including an increased IHT allowance, or who might have simply been unaware of the complex IHT gifting rules and regulations.
So, with the IHT nil rate threshold frozen at £325,000 until at least 2028 and property prices on the rise, here are the key benefits of lifetime gifting, the rules you need to be aware of, as well as other tools for an effective IHT plan.
The benefits of lifetime gifting
Lifetime gifting can be an effective tool to keep in your arsenal when it comes to tackling rising appreciation and frozen tax relief rates.
How does lifetime gifting work?
The general rule of lifetime gifting is that any assets gifted will not be subject to IHT, as long as the individual who has administered the gift survives at least 7 years after.
If someone dies before this 7-year time period, an IHT charge may apply to the value of the gift. This depends upon a number of factors such as their relationship to the individual who receives the gift, when the asset was gifted and the value of the gift.
What can I gift?
Gifting of assets can come in all kinds of shapes and sizes. From money, household and personal goods, property and land, to stocks and shares, and unlisted shares which qualify for 100% Business Property relief when considered in a IHT plan, as long as terms and conditions are met two years prior to death.
The pitfalls of lifetime gifting
Now that we’ve established the benefits of lifetime gifting, it’s easy to see why this has been such an attractive option for many. Especially for individuals across the UK who have been edging increasingly close to the nil rate threshold over the 17 year freeze period.
However, according to the Office for Budget Responsibility, it’s predicted that IHT will generate a record-breaking £7.2 billion this tax year. A large portion of those included in these statistics, it seems, fall down due to a lack of planning and awareness of tax legislation.
As HMRC continue their stringent investigations into IHT payments, now is the perfect time to consider the lesser-known rules surrounding complex areas of taxation.
The “gift with reservation of benefit” rule
This rule states that those who wish to give an asset away as a gift cannot continue to benefit from it after ownership is transferred.
An example of this would be someone who gifts a house to their child. They must not then continue to live in the gifted house. Rather, it would be seen as fair and reasonable for short visits instead to see the family, perhaps for domestic reasons such as babysitting.
Exceeding £325,000 within 7 years
Whilst it’s true that your gifts will become IHT- free after 7 years, it’s worth noting that any amount that exceeds the threshold during his time will be subject to IHT.
According to the Telegraph’s recent enquiry, by using the Freedom of Information Act, approximately £650 million has been lost by UK families within the last 3 years, where someone dies within 7 years of gifting assets to their loved ones.
This is one nobody likes to think about, but is an inevitable topic that any tax good consultant will know needs to be broached with clients when planning IHT. If a person who makes a sizable gift dies within 3 years, IHT will be charged at the full 40%. Between 3 and 7 years this charge will be tapered (otherwise known as taper relief).
Other tools to consider
Having considered the potential benefits and pitfalls of lifetime gifting, you may want to consider additional tools and gifting options available to you and your family.
Using the nil rate band
Despite the 17-year freeze, the nil rate band can still be a valuable tool in your IHT plan as it still holds the ability to significantly lower your tax liability, and in some cases completely offset it.
Each person has a nil rate band of £325,000, meaning that this is the total value of assets that can be passed down tax free to loved ones. So, it goes without saying that utilising this is the first step towards effective IHT planning.
Additionally, you should take stock of your assets and calculate where you fall regarding the nil rate threshold. You may find that you won’t need to consider any further tools in your IHT planning if you fall well within the nil rate band.
Residence nil rate band (RNRB)
Considering the average house price in the UK today, it’s not surprising that the IHT freeze is pushing more families than ever before across the threshold.
The Residence Nil Rate Band (RNRB) is an additional nil rate band that can be utilised when a property is left to direct descendants upon death.
To be eligible for the Residence Nil Rate Band, the person gifting the property must have lived in it at some point and needs to be a direct decedent of the individuals they choose to leave the property to upon their death.
With RNRB, £175,000 per person is added onto your £325,000 allowance. This means that a married couple can pass a total amount of £1 million in the form of property to their children without paying IHT.
Other gifting allowances
Certain gifts will be exempt from Inheritance Tax, even if they do surpass the threshold. These gifts include; Assets passed on to a spouse or civil partner, gifts to qualifying charities and housing associations, gifts of £3,000 or less in any tax year, small gifts of £250 or less, wedding or civil partnership gifts, gifts that are part of your normal expenditure.
Gifts out of income
While not strictly an allowance, making regular gifts out of income is another way to make gifts that could be considered, benefiting those of high net worth in particular. To qualify for this IHT exemption, the money which is transferred from one person to another must be part of the transferor’s normal expenditure out of their income, leaving them with enough money left over to maintain their normal standard of living. This is an unlimited exemption, capped only by the level of surplus income in any one tax year.
Gifting to charities
In addition to this, if a person leaves a sum total of 10% or more of the total value of their estate to charity, they will qualify for a 36% Inheritance Tax rate.
Supporting you with IHT planning
Whether you’re revising your IHT plan, starting from scratch or have recently inherited a gift, our team of tax experts are on hand to guide you through the complex IHT planning process.