"Caution urged on inheritance tax gifting restrictions as 220 families face unexpected bills due to oversight"
In the UK, gifting assets to reduce Inheritance Tax (IHT) can be a strategic move, but it's essential to avoid common pitfalls. Here are some mistakes to watch out for:
1. Continued Use of Gifted Assets
If you gift an asset but continue to benefit from it, HMRC may consider it part of your estate. For example, gifting your family home but living in it rent-free, or passing on a holiday home and regularly using it, can lead to IHT issues. Similarly, gifting valuable items like artwork or luxury cars but keeping them for personal use can trigger IHT.
2. Failure to Use Appropriate Trusts
Utilizing trusts can help manage gifts and reduce IHT liability. Without proper trust planning, gifts may not be fully effective in reducing the taxable estate.
3. Incomplete Transfer of Assets
Retaining control or benefits from gifted assets, such as shares in a family business while keeping control over dividends or voting rights, may not be considered a complete gift by HMRC. This can lead to IHT charges, especially as HMRC plans to start charging IHT on family businesses from April 2026.
4. Ignoring the Seven-Year Rule
Gifts made within seven years of death are subject to IHT taper relief. Understanding this rule is crucial for effective estate planning.
5. Lack of Formal Documentation
Ensure that all gifts are properly documented. This includes keeping records of gifts, their value, and any conditions attached to them to avoid disputes with HMRC.
Failing to correctly calculate IHT liability could result in the executor having personal liability for unpaid tax. It is the responsibility of the deceased's executors to calculate any IHT liability, which includes gifts made within seven years of death.
In some cases, a Gift Inter Vivos (GIV) insurance can help individuals protect their loved ones from potential IHT liability on money or assets gifted during their lifetime. These policies are written on the life of the person making the gift, with the amount of cover reducing over the term of the policy to match the reducing IHT liability due to taper relief.
However, continued display of gifted artwork at the gifter's home, keeping luxury cars, vintage wine collections, or valuable artwork in one's garage after gifting them, or using a holiday home every summer after gifting it may make them part of the estate and subject to inheritance tax. Similarly, continuing to live rent-free in a gifted family home may be considered part of the estate and subject to inheritance tax.
If the person giving the gift continues to benefit from the asset, HMRC does not consider it a proper gift, potentially leading to an unexpected inheritance tax bill. It's important to remember that retaining control or benefits from gifted assets may not truly give the shares away, potentially leading to IHT on family businesses from April 2026.
Keeping clear records of the gift, the existence of the policy and trust, and remembering to keep a record of premiums paid is also crucial. Although these are treated as annual gifts, they should fall within an exemption that can only be claimed by executors on the donor's death.
By avoiding these common mistakes, individuals can more effectively reduce their IHT liability through strategic gifting and estate planning. It's also worth noting that from April 2027, unused pension savings will be subject to inheritance tax. HMRC investigated 220 cases of 'Gifts with Reservation of Benefit' in 2023/24, highlighting the importance of careful planning.
- To minimize the risk of Inheritance Tax (IHT) on gifted property, it's advisable to avoid continued use of such assets, even after gifting, to ensure that HMRC does not consider them part of your estate.
- To avoid potential IHT on dividends from shares in a family business, consider transferring both shares and control over dividends or voting rights to completely lift possible IHT liabilities.
- Diversifying personal-finance portfolios may include considering Gift Inter Vivos (GIV) insurance, which can help protect loved ones from potential IHT on lifetime gifts, but ensure not to continue benefiting from the gifted assets to avoid IHT issues.
