Taxpayers to 'save' £30m in inheritance tax relief
City law firm warns inheritance tax relief could be disallowed by HMRC in certain situations
MONEY saved by people using inheritance tax relief on gifts increased by 20% between 2014 and 2015, and is expected to rise even further in the coming years, a London-based law firm has found.
Private client law firm Collyer Bristow reveals that inheritance tax ‘taper relief’ on gifts of property, cash or other assets transferred between three to seven years before death was worth £30m from 2014 and 2015 – an increase on the £25m saved between 2012 and 2013.
The amount of inheritance tax payable in the UK is tapered, with beneficiaries liable for 80% of the inheritance tax value of the asset if the person dies within three years of making the gift, reducing by 20% each year and reaching zero after seven years.
HMRC now estimates that between 2015 and 2016, the saving to taxpayers through the taper will hit the £35m mark.
James Badcock, head of private client at Collyer Bristow says: “More and more people are becoming aware of lifetime gifts as an effective way of cutting their loved ones’ inheritance tax bills, and that if properly considered there is no downside to making these gifts.
“While the seven-year IHT exemption for lifetime gifts is fairly well-known piece of rudimentary tax planning, there’s an increasing awareness that tapered relief is available if the donor does not live that long.
“A prudent approach to making gifts to loved ones allows even those who are elderly or in ill health to leave as much as possible of their hard earned savings to family and friends.”
The law firm warns that there are several pitfalls which could result in inheritance tax taper relief being disallowed by HMRC, including a law that stops those who gift property before they pass from living in it unless they pay the market rent – otherwise the gift will be ineffective for inheritance tax purposes.
“If people decide that making a gift does make sense for them then it is important to make sure the gift is effective for tax purposes. Generally the donor should not continue to benefit in any way from the asset they’ve gifted,” continued Badcock.