Some of the best Inheritance Tax saving advice which can be given would come in two simple categories: The first is spend the money and the second is give it away and live seven years.
With regard to the giving of lifetime gifts, the whole concept of the Government seems to be in favour of the principal if you give something away you give it away absolutely and you do not retain any interest or any control. Such gifted property longer ceases to be your property.
A trust is sometimes set up to try and avoid the second part of this problem but increasingly the Government is tightening up the restrictions and the administrative problems of a trust unless we are talking substantial amounts of money, then a trust may not be the best way forward but an outright gift would be better.
An outright gift can come in many categories. The simplest is cash or alternatively it could be an asset.
However, care should be taken with regard to assets because capital gains may be payable and it would be necessary for the recipient (“the donee”) at that time for any capital gains payment to apply for holdover relief when the gift is made. Nola, I thought it was the donor of the gift that applies for H/O relief as they will have the charge to CGT. The result of holdover relief is the postponement of capital gains not non-payment of it.
However, this article is about the 3Ds. What are they? They are Death, Debts and Divorce and why are they important..
If someone gives a gift away (“the donor”) absolutely and lives for seven years, then that gift is out of the donor’s estate for Inheritance Tax but what happens if the donee of the gift dies before the donor”? This clearly means that that gift is part of the donee’s estate and not the donors, and has to be aggregated with the donee’s estate and may trigger Inheritance Tax on their death rather than the donor’s estate. Also, this sum would follow the Will of the donee of the gift and it may be that on their death the donor of the gift may have opinions of where the cash should go. For example, many people write Wills leaving gifts to their children and with a gift over if their children die before them the gift goes to their grandchildren. However, it is extremely likely, for example, that say the child dies in the lifetime of the parent who has made the gift then his or her Will could leave his estate to the spouse and not directly to the grandchildren. As it is an absolute gift the donor can have no control over where it goes under the Donee’s Will.
If a gift is given to a donee and the donee gets into financial straits, then any gift is considered an asset of the donee which will be taken into account if the donee is subject to an administration order or bankruptcy or an IVA. Thought should therefore be given before making any gifts to donees who are in serious financial difficulties or indeed, generally feckless.
Again this is a similar problem that if the donee of the gifts gets divorced, then that gift again is an asset of the donee to be considered as part of the financial position of the donee.
All gifts therefore do have possibility of having being caught by the 3Ds but, as long as the donor is aware of the pitfalls, then giving away and surviving seven years in many ways is one of the most effective ways of mitigating Inheritance Tax liability.
Nola Gyles, Associate Solicitor with Mayo Wynne Baxter based at their Storrington Office.