Several ways to plan for IHT

3. Proving gifts have been made: Ensure sufficient records are kept so that executors or personal representatives can identify lifetime gifts. On death, it will be the executors who must provide details of such gifts to HMRC. An absence of information can result in additional tax being paid.

The records kept do not need to be onerous, but sufficient information should be documented to evidence the timing and nature of the gifts. 

4. Be wary of other taxes: If an asset is given away that would have otherwise triggered capital gains tax if sold, for example a holiday home, then it is likely that CGT will be payable at the time of the gift.

In the eyes of HMRC, if you give something away, you owe tax as if you have sold the asset at market value despite receiving no cash. As well as CGT, in certain instances stamp duty land tax will also be due if a property is involved.

Although certain exemptions are available here, these exemptions are largely reserved for assets that would have been outside the scope of IHT in any case.

Gift with reservation

HMRC is alive to the possibility that a taxpayer may seek to reduce the value of their estate by purporting to make gifts without in fact giving the assets away.

The gift with reservation of benefit rules state that the value of a gift which seeks to remove an asset from an estate but allows the donor to continue to enjoy the asset being given will continue to form part of the donor’s estate. To make an effective gift, the asset must have been given to the recipient and the donor must be excluded from benefitting from the gift.

A straightforward example of this would be if a parent decided to give away a share of their home to one of their children who do not live in the property. This is not an uncommon occurrence as the family home is frequently the biggest asset in an estate and consequently can increase the tax bill.

It is essential that the attorney is sure that the donor can afford the gift.

If the donor were to remain in the house prior to their death, even having transferred the legal title into the name of their child, HMRC will consider the donor to have retained a benefit in the property and will consequently include its value in the donor’s estate. 

An exception to this is if the donor were to pay a market rent to the recipient at a rate which is regularly reviewed. The recipient must report the rent to HMRC and pay any ensuing income tax liability.