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Various clauses involved in inheritance tax are catching people out and costing hundreds of millions of pounds.
The Telegraph newspaper has recently reported, following a Freedom of information request, that over the last five years HMRC have deemed more than £600 million of gifts from 2,000 people ineligible for inheritance tax relief costing the clients up to £240 million of inheritance tax.
They also reported that inheritance tax is forecasted to raise substantial additional funds for the government over the next few years. When the nil rate allowance was last increased in 2009 inheritance tax stood at approximately £2.8 billion. This is projected to increase to £6.6 billion in 2025. This increase in tax is mainly due to the increase in the value of assets over that time.
So, how can you avoid falling foul of failed gifts, and is there anything you can do to protect your families against additional inheritance tax, just due because of the increasing value of your assets?
The general rule is that once you have made a gift and survived seven years the value of the gift leaves your estate. However, where HMRC deemed that the person who has made a gift continue to receive the benefit, they will treat it as remaining in the deceased’s estate for inheritance tax purposes regardless of how long ago they gave it away. As you can see from the above figures this has cost families a great deal.
Almost ¾ of the gifts that have gone wrong relate to property, with around 13% in relation to cash, and 8% stocks and securities.
To make matters worse, as well as having to pay the inheritance tax the assets also lose some of the tax benefits from a capital gains tax position. This can lead to the families having to pay even more tax than would have been due if the asset had never been gifted.
In many cases, the tax could have been avoided by structuring the transaction in a different manner.
For example, James is in his late 80s and is widowed. His daughter Claire and son-in-law Robert would like to buy a bigger property. It is agreed that they would all like to move in together to live in the property. James does not take any advice and sells his property and transfers all of the cash to Claire allowing her and Robert to buy the new property in their names. James then moves into the property. James sadly passes away 10 years later. As James was receiving a benefit from an asset he previously owned the reservation of benefit rules would apply and HMRC would include the value of the gift in his estate even though he had survived the seven years.
If James had taken proper advice there are a few different ways that he could have potentially avoided the additional tax.
Firstly, could be that he could have paid a market rent for his occupation. If he is paying rent then he is not receiving a benefit and the gift would be effective. The payment of rent would also reduce the value of his estate further potentially saving more inheritance tax.
Secondly, if it was possible to split the title so that James just owned the part of the property he occupied then although the value of this would have remained in his estate, any additional money he had used to fund the purchase of the remaining property for his daughter would have been treated as a gift.
Thirdly, there is a special exemption when parents move in with children that providing, they keep a percentage of the ownership of the property then the gift with reservation of benefit rules do not apply. Therefore, technically if he had retained just 1% of the property, even though he lived in the property, the gift may have been effective. Please note however that HMRC may challenge situations where the percentage is extremely low and although the legislation does not set a de minimis level this has not yet been tested in court.
Mitigating tax on assets increasing in value
One way to guard against increasing asset values is to look at gifting. The reason for this is that when you give an asset away, provided that you don’t reserve the benefit, and even if you do not survive the seven year period then the value of the asset at the date you gave it away is used for inheritance tax purposes.
This can be a really useful planning tool especially when we have an asset that is likely to increase substantially in value, such as a piece of land that has planning potential.
There can also be ways of structuring the transaction so that you can still receive an element of income through using corporate structures and share classes. Or alternatively, if you need to keep control but not ownership this can also be achieved through the use of trusts.
If you would like to discuss matters or have any questions at all, please don’t hesitate to contact David Cornelius, here at Nash & Co Solicitors. You can call him on 01752 827076 or you can email
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* The information contained on this page is correct to the best of our knowledge, if you notice anything that you know to be incorrect or misleading, please contact us.