Estate planning: do not stick your head in the sand

  • Explain the pros and cons of estate planning solutions
  • Describe the difference between a potentially exempt transfer and a chargeable lifetime transfer
  • Identify how clients can avoid family disagreements when estate planning

Gift motivation

If the gifting of assets is not driven by IHT planning and is simply a wish to pass on funds now to help other individuals/family members enhance their lifestyle, then a gift of cash is a good way to proceed for those with liquid assets.  

This gives the recipient of the gift the flexibility to use the funds as they see fit.

Of course, for those with less liquid assets, gifting can be more of a challenge and care needs to be taken that capital gains tax implications are not created as a result of passing on assets (other than cash) to an individual.  

From an IHT perspective, any outright gift made by one individual to another is referred to as a potentially exempt transfer.

Making outright gifts in lifetime to another individual is one of the simplest and most straightforward ways to undertake estate planning, while also achieving the aim of enhancing that individual’s lifestyle.  

Provided they survive any such potentially exempt transfer by more than seven years, then the value gifted by the client will be outside their estate for IHT purposes. So, there is no immediate IHT charge – as long as the donor lives for another seven years.

If the donor dies, then these funds are potentially subject to a 40 per cent tax charge, as the value of the gift is included in the IHT calculation by the executors of their estate, subject to the offset of any available IHT reliefs and exemptions.

In other cases, clients are looking to make a gift to mitigate IHT on their death and retain protection over the asset.

If that is their motivation, the best option may be to put the money into a vehicle such as a trust or company, which not only allows the person making the gift to retain full control – managing who gets it, when they get it and how much they get – but can also minimise estate taxes when the donor dies.

Estate planning tools

The most traditional vehicle for estate planning is a trust. Used for hundreds of years, these still have their place, but the key thing to note is that if it is a transfer into most forms of trust, the gift is not a potentially exempt transfer but a chargeable lifetime transfer.

The main difference between them is that a chargeable lifetime transfer is subject to an immediate 20 per cent tax charge within six months of the gift being made if the asset does not qualify for any IHT reliefs or exemptions and is over an individual’s IHT nil-rate band, which is currently £325,000.