Are you planning to give away an asset and still benefit from it?
There are many anti-avoidance rules around Inheritance Tax (IHT), here we will consider them.
Gift with Reservation
Gift with reservation rules apply when you give away an asset, but you continue to obtain a benefit from the asset that has been gifted.
Example
You may want to gift your home to your children but continue to live in the house.
Traditionally, when you make a gift of a property (and it is not a chargeable transfer or an exempt transfer), it will cease to be part of your estate if you survive 7 years from the date of the gift. This is also known as a Potentially Exempt Transfer (“PET”). Where the Gift with Reservation rules apply, the asset will still form part of your estate on death, (at its market value at the date of death) and you will need to meet specific criteria to avoid paying IHT.
Let us now look at gifting your house on 1st January 2015, valued at £390,000, with the express ability to continue living in the house. You continued to live in the house until you passed away on 20th December 2022 with the house now valued at £450,000. Your estate is valued at £500,000, excluding the house. Assuming you made no other gifts in your lifetime the IHT positions with/without tax planning would look like this.
IHT Payable Without Tax Planning
Chargeable Value House £450,000
Other £500,000
Less Nil Rate Band £325,000
IHT Payable @ 40% £250,000
IHT Payable With Tax Planning
By putting in place effective tax planning your IHT tax liability would look like this.
· The IHT payable would be £70,000
· SAVING £180,000 in taxes
If you would like to explore this and other opportunities to reduce/remove IHT tax liabilities so that more of your estate will pass to those you wish to benefit you can book a FREE Initial consultation below.