The topic of reducing inheritance tax (IHT) liability is an important consideration for many individuals and families. The current landscape of rising asset values and the static IHT allowance of £325,000 since 2009 has resulted in more estates becoming subject to this tax. In fact, the Treasury has seen a significant increase in IHT receipts, exceeding £7 billion—nearly £1 billion more than the previous year.
One commonly used strategy to minimise IHT liability is to make substantial gifts to beneficiaries while you are still alive. If you live for at least seven years after making these gifts, they will no longer be counted as part of your taxable estate. However, this approach assumes that you won’t require access to the gifted capital in the future. It’s important to consider potential scenarios, such as facing a debilitating illness that necessitates expensive home modifications or private medical care for yourself or your partner.
Emotions often play a significant role in the decision to make large capital gifts, particularly when helping children secure accommodation. However, it’s crucial to exercise caution in such emotionally charged situations, as these gifts not only benefit your child but also indirectly benefit their partner, even if they are married or in a committed relationship.
To safeguard against potential disputes over whether a financial contribution was a gift or a loan, it’s advisable to formalise such arrangements with a loan deed. All parties involved should sign and have their signatures witnessed on this document, which should clearly state the loan’s terms. Without these precautions, disputes can arise, leading to unfortunate consequences, as seen in the case of Farrell v. Burden [2019] EWHC 3671 (QB).
While documenting a loan or gift may seem like an unnecessary expense initially, it can save considerable time, money, and emotional distress in the event of a dispute. If the relationship remains strong in the years ahead, you have the option to forgive the loan, and the seven-year period for IHT purposes will commence from that date.
Another viable option to reduce IHT liability is using trusts. Gifts to trusts fall outside your estate for IHT purposes after seven years. Trusts also offer the benefit of retaining an element of control over the assets. However, it’s essential to seek professional advice when considering this strategy.
A settlor, frequently parents or grandparents, creates trusts and appoints or serves as trustees to oversee and distribute assets to beneficiaries. Assets placed in a trust fall outside the settlor’s estate for IHT purposes after seven years, and any growth in the value of these assets also becomes immediately exempt from IHT. For instance, a married couple or civil partners can contribute assets worth £650,000 into a trust every seven years.
In conclusion, reducing IHT liability is a complex matter that requires careful planning and consideration of various strategies, including gifting, loan documentation, and trusts. It’s essential to consult with professionals to make informed decisions that align with your financial goals and family’s needs.
In the case of Farrell v. Burden [2019] EWHC 3671 (QB), a mother (Farrell) and her late son’s widow (Burden) got into a legal argument over the mother’s sizeable financial contribution to her son’s property purchase. The key details of the case are as follows:
- The mother had provided her son with a loan of £170,000, of which £90,000 was repaid during the same year. However, no further capital sums or interest payments were made after this initial repayment.
- Upon her son’s passing, he left his entire estate to his wife, his mother’s daughter-in-law.
- The mother took legal action to recover the outstanding amount she believed was owed to her from her late son’s estate. She argued that the money was a loan and not a gift, seeking its repayment.
- The widow, on the other hand, asserted that the funds had been gifted to the couple and were not subject to repayment.
- In this case, the burden of proof rested with the mother, as she had to provide evidence to establish that the money was indeed a loan and not a gift. This involved rebutting the legal presumption of advancement, which assumes that financial transactions within a family are often gifts.
- Unfortunately, the mother’s evidence for her request for a loan was lacking in proper documentation, and the court rejected her claim.
- The court ultimately concluded that the mother had failed to sufficiently prove her case, and it determined that the payment was, in fact, a gift.
- Consequently, the court ordered the mother to cover the estate’s legal costs, reportedly amounting to around £100,000.
- The mother appealed the case to the High Court, but her appeal was unsuccessful. Mr. Justice Freedman upheld the original decision, emphasising the absence of evidence to support the claim of a loan, particularly the lack of any formal loan documentation.
This case highlights the critical importance of proper documentation and legal safeguards when making financial contributions to family members, especially when significant sums of money are involved. Without such documentation, disputes can arise, leading to costly legal battles and unfavourable outcomes, as seen in the Farrell v. Burden case.
The decision in the case rested on the presumption of advancement, which is a legal presumption that arises within the context of certain close relationships, including parent-child relationships. It is a general rule that when someone close to you gives or receives money or property, the court should assume that it was given as a gift if there is no other evidence. The keywords here are “in the absence of any other evidence”.
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Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.
