It’s been widely reported that the television presenter and journalist Anne Robinson has given away (or intends to give away, depending on which report you read) ‘her £50m fortune’ to family members, with the intention of avoiding Inheritance Tax (‘IHT’).
Does that work? Should you be doing the same?
Well, the first point is that any gifts made within seven years of death are ‘written back’ into the death estate for IHT purposes (though IHT attributable to the gift is reduced on a tapering basis if the donor survives for at least three years). The Office for National Statistics tells us that a 79-year-old female has, on average, nearly a three in four chance of making 86: so, statistically, Ms Robinson’s timing looks sound.
The ‘gifts with reservation’ (‘GWR’) rules need to be considered: broadly, if having given something away you continue to enjoy the use of it (without paying full consideration for it) the gift is ineffective for IHT purposes. It’s reported (by The Independent) that Ms Robinson owns ‘a Grade II-listed barn in the Cotswolds, another home on Fifth Avenue in New York and a third property in The Hamptons’. Some or all of those might cause GWR issues if included in Ms Robinson’s munificence: and US advice will have been needed in respect of the two properties there.
Capital Gains Tax (‘CGT’) will need to be considered when giving away assets which are ‘chargeable assets’ for the purposes of that tax. Unless assets are of a character qualifying them for hold-over relief, CGT will be payable as if the assets had been sold for their market value. Incidentally, very early on in the history of CGT one Harry James Turner, when assessed on that basis reasonably, logically and articulately objected that:
“In giving shares to my children I have in fact made a capital loss to the extent of the full value of the shares, and any attempt by the Finance Act to describe that as a capital gain is gross misrepresentation which I view with the utmost contempt, creating as it does a contradiction in the true meaning of the English language and consequently an incomprehensible law. In fact it has been clearly stated in the House of Commons by a Government spokesman on more than one occasion that, whilst the possibility of a gift tax had been envisaged, such a tax Statute does not at present exist.”
Harry lost his case ([1973] STC 148), of course.
Assets which continue to be owned at death benefit from a ‘free’ uplift to market value in the hands of executors and beneficiaries. One risk, therefore, of gifting assets during lifetime is that of falling between two stools: that is, failing, because of unexpectedly premature death, to secure the intended IHT advantage; but suffering the CGT cost of lifetime disposal. In substantial cases, insurance against premature death may be worth considering.
Giving back to you some of the money transferred
What happens if, having given away all your assets, you find yourself unexpectedly in need of money – perhaps for care home fees? Giving assets away can leave you uncomfortably vulnerable, as King Lear found to his cost: but assuming that your family is more Cordelia than Goneril or Regan there is no problem with their giving back to you some of the money transferred should you subsequently need it (and, of course, assuming that the funds are still available in liquid form, or available at all, at that time). But that must be a separate and independent decision on the part of the donees, not part of the arrangement under which the money is given to them. Subject to that, borrowing money back to meet unexpected costs (or having the donees meet those costs on your behalf) doesn’t invalidate the original gift.
You can’t, however, get a ‘double-dip’ by giving money away and borrowing back at a later date in the expectation that the debt so created will reduce the value of your estate: there is specific legislative provision (Finance Act 1986, s103) denying such a reduction in these circumstances. In fact, s103 goes even further than that. If you have made a gift to a person, no deduction may be made in computing your estate for any debt owed to that person if and to the extent that the loan could have been made out of the property gifted (even if it is plain that it was not) unless it can be demonstrated that the gift ‘was not made with reference to, or with a view to enabling or facilitating’ the making of the loan.
So: does giving assets away ‘work’ for IHT? Yes. But take care.
For guidance on IHT and estate planning, please get in touch with your usual BKL contact or send us a message.