Q: Can you explain the tax implications of making a gift out of one's estate during one's lifetime?
A: One of the more straightforward inheritance tax planning devices, for those who can afford it, is the making of lifetime outright gifts of assets. Under normal circumstances, provided the transferor survives the date of the gift by seven years, the value of the gift is not included in the IHT calculations on death.
An earlier article warned that if an individual purports to give away an asset, but still retains the use or enjoys the benefit of that asset, then the gift is probably a “gift with reservation (GWR)” and its value is included in the estate at death for IHT purposes.
The use of the word probably is deliberate. Tax planners devised various methods to try to circumvent the GWR rules including, but not restricted to schemes and arrangements for giving away the family home, but then continuing to live in it.
Largely as a result of such tax planning, the tax year 2005-06 saw the introduction of the “pre-owned assets” rules which, in essence, are intended to impose an income tax charge on the benefit of using an asset where that asset, or an earlier asset from which the later asset was derived, was previously owned by the individual and disposed of other than by way of a disposal at arm’s length to a person not connected to him.
There are other conditions and possible exemptions to take into account, but one of the perceived injustices of this piece of legislation is that ownership of the earlier asset can date back as far as March 1986 so an income charge now due to a transaction that may have taken place 30 years ago and up to 19 years before the introduction of the charge is seen by some to amount to retrospective legislation.
Once the pre-owned assets rules come into play, the individual has a relatively short window of opportunity to disapply those rules in return for agreeing to treat the asset as comprising part of the estate for IHT purposes.
Unfortunately, like so many tax anti-avoidance provisions, the pre-owned asset legislation can equally affect 'innocent' transactions and so needs to be borne in mind when carrying out any tax planning or wealth protection exercise.
Ben Chaplin is managing director of Taxwise
