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.

Gift with reservation rule

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 gave away a second home and continued to use it as and when you want, the HMRC would state that you hadn’t indeed 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, it would not be a GWR and would fall outside of your estate after the standard 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. 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.

Pre-owned assets rule

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 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. Please contact us for free advice.

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