Inheritance Tax and The Law

Thinking about dodging inheritance tax duties by making gifts to your children? Watch out!

Families have been stung by an HMRC ‘raid’ over the past five years which has hauled in an eye-watering total of £700m.

Over 2,000 families were investigated and ordered to pay tax owed to HMRC after it was decided regulations had been breached.

By making lifetime gifts (for instance, giving assets to adult children) there is hope to bring down one’s total estate figure. The standard threshold for IHT is £325,000. This is called the ‘nil rate band’. When calculating the value of your estate, this will include the assets you may own at your death and also gifts (exceeding annual allowances and exemptions) made by you in the seven years prior to your death, and any assets from you enjoy the benefit or income from.

In respect of married couples, if the first spouse dies and all or part of their Nil Rate Band is unused, then the unused Nil Rate Band can be passed on to the survivor. This gives a potential inheritance tax allowance of £650,000.

Each individual is also each entitled to a Residential Nil Rate Band.  In summary, this is available when an interest in qualifying residential property is left on death to direct descendants.  The maximum amount of the Residential Nil Rate Band is currently £175,000.00 for the tax year 2022/23.  The Residential Nil Rate Band can also be transferred to your surviving spouse if unused on death.

If the value of your estate is under £325k – no IHT is due. If there are no other allowances or exemptions available, the value of your estate over £325k will be charged 40%. For example, if your estate is worth £375,000: £50,000 would be charged at 40%, equalling £20k to the tax man.

One common type of ‘gift’ is for parents to transfer ownership of their property to their children but continue to live in the house. This is known as a ‘gift with reservation of benefit’. In some cases, parents were not aware that in order to reside in the house, they should have paid market rent to their children. In the eyes of the HMRC, without paying rent, the original owner continues to benefit from that asset and therefore it is not a true gift and tax implications will be at play.

There is also something known as the 7-year rule. This means no tax is due on gifts if the giver lives for another 7 years. But, if the giver does die before 7 years is up and the gift triggers inheritance tax, the amount due might not be the full 40%. This is known as ‘taper relief’ and the amount of relief depends on when the gift was made.

IHT raises a vast amount of money for the Treasury and it is predicted IHT will generate £7.2bn in 2022-2023. What can you do to reduce your estate safely?

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Please note the above is for information purposes only and is intended to be a short summary.  It should not be treated as a comprehensive guide and should not be acted on without qualified legal advice.