INHERITANCE TAX - 27.11.2019

Can you “maintain” your family at HMRC’s expense?

The seven-year glitch

Any tax expert will tell you that the simplest way to reduce the inheritance tax (IHT) payable on your estate, and so increase how much your beneficiaries will receive, is to pass your wealth on to them sooner rather than later - assuming you can afford to. To be blunt, the older you get the greater the chance of you dying within seven years of giving away your wealth, and if that happens HMRC will take the value of the gift into account when working out the IHT bill. The good news is that you can avoid this seven-year glitch by making use of IHT exemptions and reliefs.

Exemptions and reliefs

If you give away cash or other assets which are less than the annual IHT exemption (£3,000) or another gift exemption applies, the seven-year rule won’t cause the value of the gifts to be taken into account for IHT. Also, if you own business or agricultural property, the amount on which IHT is payable is reduced by either 50% or 100%. These IHT breaks are well known, less so are those which reduce the value of your estate liable to IHT but don’t involve direct gifts.

For detailed commentary on IHT exemptions, visit http://tipsandadvice-tax.co.uk/download (TX 20.05.06).

Shifting or gifting wealth

Money or wealth used to improve someone else’s lot without actually giving them an asset is a “disposition” of value. From HMRC’s perspective this more or less has the same effect as if you had made a gift. For example, waiving your right to a dividend so that other shareholders get an advantage, or delaying when you take your private pension so that the value which passes to your beneficiary when you die is increased can count as dispositions. However, IHT legislation states that certain dispositions are ignored for IHT. One example is “dispositions for family maintenance”.

Keep it in the family

IHT-free family-related dispositions include those for:

• the maintenance of your, or your spouse’s, children while they are under 18 or in full time education
• your, or your spouse’s, parents
• any relative of yours, or your spouse, that is dependent on you for care.

Educational fund

One way to make use of the exempt dispositions is to set up a fund for your child’s eduction (until they are 18 or, if later, cease full time education) and maintenance. You might pay for or contribute towards these costs as you go out of your earnings or savings. Each time you pay a bill for the education/maintenance of your child it reduces your estate and thus the potential IHT, but you could do better.

Tip. Setting aside money specifically for the future cost of your child‘s education and maintenance takes it out of your estate immediately. It’s usual to set up a trust (which you can manage as trustee) to hold the money or assets you earmark for the purpose. That way HMRC can’t argue that the money or assets were intended for another purpose. A solicitor can set up a simple trust of this type relatively cheaply, so for around £1,000 you can protect your estate from considerably higher sums of IHT.