Making gifts to avoid inheritance tax
The making of lifetime outright gifts of assets is a straightforward tax planning device, if you can afford it. The value of the gift won’t be included in the IHT calculations if the transferor survives the date of the gift by at least 7 years.
If you still use or enjoy the benefit of a particular asset but plan to give it away, then the value will be included in the IHT, as it is probably a ‘gift with reservation’ (GWR). For instance, if you give away a second home and continued to use it as and when you want the HMRC would state that you hadn’t truly given it away as you were still enjoying the full benefits of ownership. However if you had paid rent to the beneficiaries of the gift for the weeks that you used the property that would not be a GWR and would fall outside of your estate after the normal 7 year period.
I said probably as tax planners have come up with many different methods to try and work their way around the GWR rules. This means it’s not restricted to schemes for giving away your family home but still living in it. However we are always very doubtful about schemes that fly in the face of the intention of the tax rules. Basically, if it sounds too good to be true it probably won’t work.
In the tax year of 2005-2006 ‘pre owned assets’ rules were introduced. These rules are intended to impose the income tax charge on the benefit of using an asset where it previously owned by the individual and was disposed of by means that are not considered to be an arm’s length transaction.
There are many complicated rules and regulations which you have to obey when dealing with making gifts to avoid inheritance tax and pre owned assets. HMRC can look back to previous owners as far back as March 1986. This means income charges can still take place, even on transactions which took place over 30 years ag.
Once the pre-owned asset rules come into the equation, it leaves you with a very short amount of time to dis apply those rules in return for agreeing to treat the asset as a part of the estate, all for IHT purposes.
All pre-owned transaction need to be included when tax planning as even ‘innocent’ transactions can be affected.
As experienced IHT advisers we can help you by guiding you though the processes to ensure that if you are making gifts to avoid inheritance tax you do not have to pay these taxes and charges.
Call us if you need any help on your IHT issues.
Inheritance tax on the elderly
Data shows that inheritance tax payments to HMRC are due to rise sharply as it has revealed that the number of older people set to leave over £150,000 after death has doubled over the past 10 years.
Research shows that the number of wealthy people over the age of 80 has increased by 45% over the last 10 years. In addition, the number of people set to leave £150,000 to family has risen to 44% from 24% and the rise is dragging more families into inheritance tax. The rise in wealth and inheritance seems to be the result of home ownership and rising house prises. For the first time ever inheritance tax for ‘death duties’ totalled up to over £4 billion in 2016, which is causing a strain on middle class families.
This April, an addition of a ‘Residential Nil Rate Band’ is going to be put in place to reduce the amount of middle class families having to pay inheritance tax bills although the total amount collected is set to continually rise over the next few years.
Inheritance tax on the elderly gets introduced on assets over £325,000 but from this year the threshold will begin to rise up to an extra £175,000 in residential property wealth over the next 3 years.
It is believed that more people are leaving large inheritances and are being pushed over the inheritance tax threshold but actual number of middle class families having to pay the inheritance tax is set to be reduced by the higher threshold. However, if the government isn’t happy with the effect over time then a peg would have to be put in place to increase its value relative to house prices rather than a consumer prices
We believe that unless the peg is put on the rising house prices rather than consumer price, then there will still be an increase in the number of middle class families paying inheritance tax. It would be fairer to peg the increases to house prices instead of CPI, as CPI is rising a lot slower, especially in the south of the country.
The number of over 80’s who are expecting to leave an inheritance has increased to 72% up from 60% in a decade which means that the number of individuals expecting to receive inheritance has increased across generations. The number of people born between 1930 and 1970 who are being left an inheritance has also doubled compared to 10 years ago.
In conclusion, the amount of younger people who are set to be left inheritance is all dependent upon who their parents are compared to previous generations. The elderly today have a lot more money to leave their family now due to homeownership and the increase in house prises.
At the same time, it will be difficult for young adults to get wealthy with no aid due to the fall in homeownership for that age category as well as the decline in defined pensions within the private sector and the lack of growth in their incomes.
As a result of both of these issues older people and their children should seek expert advice from an experienced financial planner in order to avoid inheritance tax.
Call us to see how we can help you avoid inheritance tax.