A recently published report by real estate agency Knight Frank stated that “the millennial generation is set to become the richest ever as they inherit their families’ wealth.” So Inheritance Tax (IHT) is looking to be a hot topic over the next few decades.

With over £2.5 trillion tied up in property wealth and with a large amount of first-time buyers not able to get on the property ladder, some are thinking ahead and gifting cash and property to their millennial children. Last year, a record 61% of first-time buyers received a combined total of £10.6 billion in help from their parents to get on the property ladder.

The rate of Inheritance Tax is currently 40% on assets that exceed an individual’s available Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) if available, currently £325,000 and £175,000 respectively. During the 2022/23 tax year, the UK government received approximately £7 billion from Inheritance Tax receipts, a steep rise from the £6 billion received in the 2021/22 tax year.

With no signs of Inheritance Tax being abolished anytime soon and a large transfer of wealth between the generations approaching, there has never been a better time to assess your exposure to Inheritance Tax to maximise the benefit of your estate to your family members, rather than HMRC.

Will planning

The most important thing to consider is to ensure that you have a valid up to date will in place to ensure your wishes are followed upon your death. If you were to die without having a valid will in place and no known family, there is a risk that your assets could be passed to the Crown.

If you have a will in place but it is some years old, it may benefit you to have this reviewed to see if any further tax planning opportunities could be identified for to your estate. Please contact a member of our team to see if we can assist you any further.

Lifetime gifts – a quick recap

Exemptions

A popular method to reduce the value of an individual’s estate is to make lifetime gifts to their family or friends. Making these gifts could give rise to an Inheritance Tax charge depending on the nature of the gift, so it is important to be aware of the various exemptions that are available. These exemptions are as follows:

• Spousal exemption
  
• Gifts to UK/EEA charities
  
• Marriage gifts
  
• Small gifts
  
• Annual exemption
  
• Gifts out of surplus income

Gifts out of surplus income

A method increasing in popularity over the last few years is making gifts out of surplus income. This is where an individual can make gifts in excess of the £3,000 annual exemption without giving rise to an IHT liability. To make such payments, an individual must meet all of the following conditions:

• It must be the individual’s intention for the gifts to form a pattern; and
  
• The gift must be made out of income generated during the same tax year; and
  
• Any gifts must not reduce the donor’s standard of living.
  

Upon the donor’s death, all gifts will be considered to ensure that they qualified for this exemption, but if they do qualify they will not be caught by the seven-year rule.

As this is an area that HMRC pays particular attention to, it is recommended that you seek professional advice before making your initial gift.

Potentially Exempt Transfers

Making a gift to an individual who is not your spouse or civil partner will be considered a Potentially Exempt Transfer (PET) for IHT purposes with no immediate charge to IHT arising from the gift. If the donor were to die within seven years of making the gift, it would then become chargeable to inheritance tax and if the value of the gift exceeds the donor’s available Nil Rate Band, the excess could be subject to IHT at a rate of tax as high as 40%. Any IHT arising would be payable by the recipient.

Taper relief would be available on the value of the gift, in excess of the NRB if the donor survives at least three years of the gift. The taper relief that could apply is as follows:

Chargeable Lifetime Transfers

If you were to make a gift to a trust or a company, this would be considered a Chargeable Lifetime Transfer (CLT). If the donor makes a gift to a trust and this exceeds their available Nil Rate Band, the excess would be subject to Lifetime Tax at the rate of 20%.

If the donor were to die within seven years of making the gift, this would then become subject to IHT at a rate of up to 40%. Taper relief would still be available as explained above and any Lifetime Tax paid would reduce the amount of tax due. However, any Lifetime Tax paid cannot reduce the tax due below nil.

For more information on the above exemptions, PETs and CLTs, read our article ‘ Concerned about how Inheritance Tax could affect you? It may be time to consider lifetime gifts. ’

Gifting your main residence to your children

For the majority of estates, the main asset would most likely be the family home. If an individual were to gift their main residence to their child, but continue to reside in the property, a Gift With Reservation Of Benefit (GWROB) would arise. This means that the gifted property would remain in the donor’s estate and could result in more IHT becoming payable if you were to die within seven years of the gift, so it is not a viable option for all individuals. The reason for this additional tax is due to the RNRB only being available on death, so there is a chance that this could be unavailable to your estate if your only property has been gifted in the seven years prior to your death.

Taking steps to ensure that the above transaction does not become a GWROB is more complex, but below are a few options to ensure that the gifted property remains outside of your estate.

By payment of a market rent

It is possible for the donor to pay a market rent to the recipient. The recipient’s income tax position should be considered as these payments will be taxable through Self-Assessment and could be subject to income tax as high as 45%. The rent paid must be a genuine market rent, so regular rent reviews would be required as even having a shortfall of £1 would be considered as receiving a benefit meaning a GWROB would arise.

If arranged correctly, this is also a good method to remove excess cash from an individual’s estate.

By being virtually excluded from benefit

This option is not feasible for most individuals as it would involve the donor moving out of the gifted property for the majority of the year.

It is advised that you seek professional advice before proceeding with such a transaction.

Part gift and share thereafter of land

If both donor and recipient live together after the gift of the donor’s main residence, no GWROB would arise. The property must be both the donor and recipient’s main residence but does not have to be their only residence. The donor would need to provide evidence that it is used as one of their homes, such as being able to come and go as they please.

An area to pay attention to is that the donor and recipient must be careful to not over-pay for utilities, repairs and other expenses of the property as there can be absolutely no benefit to the donor without a GWROB arising.

Extensive proof would be required in order to ensure a GWROB does not arise.

Again this is an area that HMRC pays close attention to and, it is strongly recommended that you seek professional advice before considering gifting your home.

The gift of a property may also have Capital Gains Tax implications that need to be considered.

Have you spoken with your financial adviser recently?

The points discussed above may be worth discussing with your financial adviser. If you do not have a financial adviser or are unhappy with your current adviser or portfolio performance, please do get in touch with a member of our team to see how we and our Rickard Luckin Financial Services Team can assist you.