You may have seen in the news recently that TV Personality Anne Robinson has claimed she gifted her assets to avoid payment of Inheritance Tax. But does this form of estate planning strategy actually work?
On the face of it, gifting assets can be an effective estate planning strategy to reduce Inheritance Tax (IHT) liability, but it’s crucial to understand the potential pitfalls and complexities involved.
What are the key potential pitfalls of gifting assets to avoid inheritance tax?
There are several pitfalls to be aware of when considering gifting assets as part of your estate planning strategy, some of which are noted below:
- A possible Capital Gains Tax (CGT) Charge
Gifting assets to a ‘connected person’, such as a family member, can trigger a disposal for CGT purposes. This could result in an immediate CGT charge., meaning that you might have to pay CGT at the time of the gift.
- No CGT Uplift
Normally, assets held at death benefit from an uplift in their base cost for CGT purposes, potentially reducing any CGT liability for the beneficiaries. If you gift assets and then do not survive for 7 years, the gift is included in your IHT calculations but without the CGT uplift benefit, meaning your estate may be liable to pay more than would have been the case if the assets remained with you.
- Gift with Reservation of Benefit
If you retain any benefit from the gifted assets, such as living in a gifted property rent-free, the assets may still be considered part of your estate for IHT purposes. This is due to “gift with reservation of benefit” rules which mean that if you gift assets and continue to benefit from them, there may still be a liability attached to them.
- Seven year survival period
If you do not survive for seven years after making the gift, the gifted assets are included in your IHT exposure. The recipients of the assets may be liable for the IHT, which could be problematic if they have already spent the gifted assets.
- Value of the Gift
For IHT purposes, it’s the value of the loss to your estate that is included in the IHT calculations, not the value of the gifted asset itself. This can complicate the assessment of the estate’s value.
- Divorce Risks
If you gift assets outright to children and they subsequently divorce, those assets may be considered in divorce settlements, potentially being shared with their ex-spouse as part of a settlement. A prenuptial agreement before marriage or a post nuptial agreement after marriage can assist.
- Access to Assets
Consider whether you might need access to the gifted assets during your lifetime. Once gifted, you no longer control them or should have benefit from them, which could impact your financial security or income.
- Care Fees Assessment
Gifting assets can be seen as deliberate deprivation of assets if the local authority needs to assess your contribution towards care fees. This could again add complications and affect eligibility for state-funded care.
Can careful estate planning help minimize risks when gifting assets?
While gifting assets can be part of a successful estate planning strategy to minimize inheritance tax, it's essential to seek specialist advice to structure these gifts properly.
An experienced professional can help navigate the complexities and ensure the strategy aligns with your financial goals and legal requirements, thereby avoiding the pitfalls that could undermine your tax planning efforts.
Our team has extensive experience of tax and estate planning and would be happy to discuss you situation or answer any questions you may have.