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Making gifts to your family – don’t get it wrong when it comes to Inheritance Tax

Inheritance Tax (IHT) is not only controversial but incredibly complex and as a result, widely misunderstood – especially when it comes to getting your head around exactly what and how much you can gift to your family.

Figures obtained by The Daily Telegraph though a Freedom of Information request show that HMRC has claimed £372 million in ‘gifts gone wrong’ over the last three tax years solely because people have fallen foul of the complicated rules on gifting.

In the 2017/2018 tax year, a total of £128 million worth of gifted assets ended up being hit by IHT because the rules regarding what’s known as a ‘gift with a reservation of benefit’ had not been followed.

Why are mistakes being made?

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.

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.

The problem of the family home…

As property prices have soared, with 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 rent free, 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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