Inheritance Tax 

Practically perfect tax planning the Mary Poppins way

Lynne Rowland

Lynne Rowland

Many people have been entranced by the new Mary Poppins film, Mary Poppins Returns.

Her practically perfect approach of helping others to help themselves is easily applicable to gifting.

Generosity comes in many forms, but where cash is gifted, the smarter you are the more value can be received.

While magic carpet bags from which sizeable gifts emerge are in short supply, there remain ways to surprise beneficiaries. Just remember that anything can happen if you let it. 

In the real world, it is possible to sum up HM Revenue & Custom’s approach to lifetime giving as “extremely stubborn and suspicious”.

You must ensure that you have made a gift without any strings attached for it to be effective for inheritance tax (IHT) purposes.

It is possible to make any number of small gifts of not more than £250 per recipient without any tax consequences.

Larger gifts which exceed your annual exemption limit of £3,000 are potentially exempt transfers provided you survive for seven years after the date of the gift.

However, gifts can be taxed if the beneficial ownership is retained - even if legal ownership has passed. This is often the case when families gift property but continue to use that property without recognising the continuing benefit and then paying a market value for that benefit.

A gift may not look like a gift in these circumstances, and it is worth remembering that you should never judge things by their appearance - even carpet bags. 

If you are lucky enough to have surplus income, with a little advance planning it is possible to make an unfettered gift that is not subject to the seven-year clock.

Making regular gifts out of surplus income represents tax planning that is practically perfect in every way. It helps to reduce an individual’s estate for IHT purposes, it facilitates generosity, and there is no seven-year window of survival to pass.  

The donor must have been able to make the gifts from income without adversely affecting their standard of living, and that means they must not come from a source of capital.

The timing of these payments need not be as punctual as Admiral Boom’s canon, but a clear intention to make regular gifts is required so that the tax exemption applies.

Many families are choosing to set up trusts to retain an element of control, while removing assets from their direct ownership and enjoyment. A discretionary trust can ensure that no beneficiary has a defined entitlement, yet the trustees have the discretion to provide the beneficiary with a potential source of income or capital.

The objects of a trust fund are stated in the trust deed and are typically used to support lineal descendants and in practical terms help pay for education, property, or, if the trustees consider it appropriate, a “jolly holiday”.