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Gifts and Inheritance Tax – making sure you don’t mess up

Complex and confusing not to mention potentially costly and upsetting - Inheritance Tax law is not an easy subject to get your head around.

But two new reports have shed fresh light on just what a minefield Inheritance Tax (IHT) rules are and how hundreds of people are losing out every year as a result:

  • Feedback from the public to a consultation carried out as part of the Office of Tax Simplification's review of IHT led it to conclude the process is 'complex and old-fashioned' with too many people having to fill out forms even when their relatives left only a small amount of money;
  • Figures from HMRC have revealed that a large number of attempts to give away assets to family members and avoid IHT 'went wrong' with the taxman claiming a total of £261 million in the last two years instead.

Why are so many people losing out?

Of course, we all want our children to inherit as much of our estate as possible when we die and minimise the tax they have to shell out.

Making gifts is one way to address this and is often something people decide to do in the later stages of life to reduce the value of their overall estate. This is because anything over the personal allowance of £325,000 is taxed at 40 per cent.

Normally, any gift of a cash lump sum is free from IHT as long as you live for at least seven years after making it. But if certain strict requirements are not met, the gift will forfeit its IHT exemption.

And with the taxman scrutinising more estates than ever before - and collecting a total of £5.2 billion in IHT last year alone - it is wise to be aware of what the pitfalls are.

So, how can I safely 'gift' to my children?

Sadly, this is not a straightforward question to answer.

Because property prices are increasing, and the size of more and more estates getting bigger as a result, a rising number of people are falling into the IHT bracket.

Many, for example, consider signing over their home to their children but continuing to live in it as a way round the IHT problem.

This is known as a 'gift with reservation of benefit' and unfortunately, can still have IHT consequences.

This is because if you make a gift but retain the benefit - in this case the benefit of continuing to live in the property - and the benefit remains until you die, the gift will form part of your estate for IHT purposes on your death.

One possible solution is to pay the full market rent to your children with a lease or tenancy in place with regular rent reviews whilst you continue to live there.

There are a number of other exceptions to the rules regarding 'gifts with reservation of benefit' so it is vital to take independent legal and financial advice for your own circumstances before making a decision.

For help, advice and guidance on this complicated area of the law please contact Wards Solicitors' Wills, Probate and Mental Capacity team by phone or pop into one of our 11 local offices.

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