In this article, Elina Topham reveals why some lifetime gifts fail to reduce Inheritance Tax and why careful consideration is essential to ensure such gifts achieve their intended effect.
Those who are keen to reduce their Inheritance Tax (IHT) liability, while also enjoying the benefit of seeing their loved ones make use of their inheritance, may consider gifting assets during their lifetime. Lifetime gifting can play a valuable role in estate planning, but it requires careful consideration if it is to have the intended effect.
For a lifetime gift to fall outside the estate for IHT purposes, it must generally be made at least seven years before death. However, this alone is not sufficient. The gift must also be absolute, with no benefit being retained from the gifted asset. If any benefit is retained, the gift may become ineffective for IHT purposes under the gift with reservation of benefit rules.
These rules most commonly arise where a property is transferred to another, often a family member, while the original owner continues to live in the property rent-free. Unless all rights of occupation are given up and a full market rent is paid to the new owner, the gift will be treated as a gift with reservation of benefit. The consequence is that, for IHT purposes, the property will continue to be treated as part of the original owner’s estate, regardless of how much time has passed after the date of the gift.
It is important to note that while such a gift is ineffective for IHT purposes, it is not legally void. The property does not revert to the original owner’s estate, but the estate remains responsible for any IHT due on its value.
Similar issues arise in relation to other assets such as investment portfolios. If a portfolio is gifted but the original holder continues to receive the income generated by it, the gift will also be treated as a gift with reservation of benefit, and the asset will remain within the original holder’s taxable estate.
Gifts with reservation of benefit therefore represent a significant trap in lifetime gifting. Without careful planning and awareness of the surrounding rules, a gift may fail to achieve its intended tax advantage, potentially creating unexpected IHT liabilities for the estate.
Professional advice can help you find out whether lifetime gifting is necessary and effective in your circumstances.
For more information, please contact Elina Topham:
Tel: 01773 821 665
Email: [email protected]
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