04.11.24

Inheritance Tax Planning and Gifts for the Maintenance of Family Members

We advise many families about the succession of their estate and one of the questions we often get asked is why our package of advice in this area is called ‘Planning for the Future’ and not, perhaps, simply ‘Wills and Trusts’. This is because when helping someone get their affairs in order there is so much more to think about than just the Wills and Trusts. Planning for the Future captures lots of other issues you need to consider including the very important issue of Inheritance Tax (IHT).

It is very common for parents to make payments for the maintenance or education of their children. A good example of this is the payment of private school fees. These payments (or ‘gifts’) can seem straightforward and uncontroversial and often parents do not even think to mention them. However, these gifts need to be considered carefully as they may have an impact on your IHT position.

IHT is this country’s death tax, but is not actually paid by everybody. Every person can pass an amount of assets on their death free of IHT. This amount is known as the Nil-Rate Band (NRB) and is currently set at £325,000. If you leave a property to lineal descendants, you have an additional NRB of £175,000 (subject to a number of conditions). This means that, if everything is set up correctly, a couple who are married or in a Civil Partnership can leave a total of up to £1m on their death without IHT being payable. This does sound like a lot, but with rising property prices more and more families are finding themselves with an estate which is liable to IHT. Remember, for a married or civil partnered couple, anything in excess of £1m thresholds will incur IHT at 40 % (correct at the time of publication).

The families we advise are often concerned about the likely IHT bill their estate will suffer when they die. There are various legitimate methods by which you can reduce your estate for IHT purposes and a big part of the work I do involves advice in this area.

Normally, if someone makes a gift to another person, the person making the gift has to survive for 7 years for the gift to be outside of their estate for IHT purposes. If they do not survive for 7 years, the amount of the gift is classed as still part of that person’s estate for IHT purposes.

So how does this all relate to making simple payments for the maintenance of your family? Well, importantly, some special types of gift escape the 7-year survivorship requirement. If you are married or in a civil partnership and make a gift to your child, that gift will escape the 7-year survivorship requirement if:

• the gift is made for your child’s maintenance (providing food, clothing and a roof over their head) and they are under the age of 18; or
• the gift is made for your child’s education or training. This is still applicable if your child is over 18 and has continued a full-time education program, for example university fees.

These categories are broad and will include a wide range of payments made to children which might, especially if added up over a number of years, amount to a considerable sum. This can therefore be a very an effective way of reducing your IHT liability.

If you are the parent of a disabled or vulnerable child, this relief is especially important. ‘Gifts’ are ignored when ‘reasonable provision’ is being made for a dependent child’s care or maintenance. The addition of the word ‘care’ here is important. It could be argued that care means health, welfare and protection, but HMRC considers that ‘care’ has its literal meaning; actually, going into care in an institution. This limits the potential scope of this relief but if, for example, you are making regular payments to a child in respect of their accommodation costs for private care, the amount of money which may fall within this relief is likely to be considerable.

This allowance may also apply when a Trust is created for the ongoing benefit of a child. This is as long as the amount transferred into Trust is proportionate to the anticipated costs of the education or maintenance. There are other important considerations to think about before making a Trust and gifting into it. Tax should not always be the driving factor behind decision making.

It’s really important to keep an accurate list of any gifts you make, including the dates, amounts and recipients of such gifts. This will not only allow your Executors to efficiently provide full accurate information to HMRC with confidence after you have died, but also enable them to claim any applicable reliefs.

The rules surrounding IHT planning are complex, but if the reliefs are utilised properly significant IHT savings may be possible. This means more money can pass onto your relatives for their benefit after you are gone. The benefits of taking legal advice in this area cannot be overstated.

How can we help?

Our team of experts specialise in planning for the future, and can assist you in planning the most effective way of managing Inheritance Tax and providing for your family.

If you would like to discuss your own family’s circumstances or have a question regarding inheritance and making gifts to your family – including to a disabled or vulnerable child –  please get in touch and speak to one of our specialists on 01273 610 611 or email us at info@renaissancelegal.co.uk