IHT ‘taper relief’ projected to be worth £35million this year, up from £25million in 2012/13
The amount of IHT taxpayers have saved on gifts made during the final years of a person’s lifetime has jumped by 20% in two years, as the benefits of gifting sooner rather than later become more widely recognized, says Collyer Bristow, the leading private client law firm.
Collyer Bristow points to figures which show that Inheritance Tax ‘taper relief’ on gifts of property, cash or other assets transferred between three to seven years before death was worth £30million in 2014/15, up from £25million in 2012/13 and that HMRC estimates the saving to taxpayers will hit £35million this year (2015/16).
Collyer Bristow points out that far bigger IHT savings are being made on gifts taking place seven years or more before the donor dies where no tax at all will be due. Inheritance Tax becomes due on gifts made during a person’s lifetime if that person dies within seven years of the gift being transferred.
The amount of IHT payable is tapered, with beneficiaries liable for 80% of the IHT value of the asset if the person dies within three years of making the gift, reducing by 20% each year and reaching zero after seven years.
Collyer Bristow says these statistics show that individuals are successfully protecting family assets from a tax which many see as particularly unfair. However, the firm adds that this potentially places elderly individuals in a position where they risk their own financial security to ensure their hard earned savings pass to their loved ones rather than the taxman.
James Badcock, Head of Private Client at Collyer Bristow says:
“More and more people are becoming aware of lifetime gifts as an effective way of cutting their loved ones’ Inheritance Tax bills, and that if properly considered there is no downside to making these gifts.
“While the seven-year IHT exemption for lifetime gifts is fairly well-known piece of rudimentary tax planning, there’s an increasing awareness that tapered relief is available if the donor does not live that long.
“A prudent approach to making gifts to loved ones allows even those who are elderly or in ill health to leave as much as possible of their hard earned savings to family and friends.”
Warning over pitfalls which could result in IHT relief being disallowed
However, Collyer Bristow warns that there are several pitfalls which could result in IHT taper relief being disallowed, for example:
• Individuals needs to consider very carefully whether they can afford to make gifts.
• Those gifting property cannot continue to live in it unless they pay the market rent, otherwise the gift will be ineffective for inheritance tax purposes and may also give rise to a Pre-Owned Assets Tax liability.
• HMRC is unlikely to accept that adding another name onto a bank account as a joint account holder qualifies as a gift, as the person making the “gift” can still access and control the entire amount in the account.
• It is important to have a clear record of the gift. Collyer Bristow advises that those involved should consider having a Deed of Gift drawn up, setting out exactly what is being transferred, to whom and when.
• Gifting an asset could give rise to other tax liabilities, such as capital gains tax or stamp duty.
James Badcock says, “If people decide that making a gift does make sense for them then it is important to make sure the gift is effective for tax purposes. Generally the donor should not continue to benefit in any way from the asset they’ve gifted.”
Collyer Bristow points out that some life insurance policies are designed to cover the costs of an unexpected IHT bill on gifts if the person making the gift does not survive for the minimum seven years required for full IHT exemption.