Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about whether a widower can give assets from his late wife’s estate to their daughters before the assets are actually received.
‘My client is 92 and lost his wife earlier in the year. My client’s estate is worth around £2m at current values, and there is in the region of £3m in the wife’s estate.
My client says he does not need the money from his wife’s estate and would like to give it to his daughters. Obviously, surviving the gift by seven years could be a bit of a stretch, but there would be a reduction in inheritance tax if he could survive the gift by three or more years.
While he is keen to do this, we are waiting for the solicitors to obtain probate for the wife’s estate, which is delaying the gift of the assets to the daughters.
I am wondering if there is a way of giving away the assets before they are actually received, such as an IOU arrangement so that we can set the clock ticking on the potentially exempt transfers sooner rather than later.’ Query 20,051 – Sparrow.
Terry Jordan’s reply: Assets pregnant with capital gain could be routed through a trust.
‘The wife’s estate could not benefit from the IHT residence NRB as the taper reduces it to nil – there is no scope to use it or for it to accrue to the client. However, on the premise that there is a residence, if his estate can be kept to £2m, a single residence band of £175,000 will be available on his death in addition to the late wife’s NRB and his own, if unused.
Can the assets be given away before being received? There is a potential pitfall if the client disclaimed his interest in the wife’s estate. IHTA 1984, s 142(1)(b) would cause the disapplication of the spouse exemption in the wife’s estate. Unlike variations under s 142(1)(a) there is no requirement for a ‘reading back’ statement for retrospective treatment to apply (as there is under sub-section (2)).
What else might be done? Depending on the composition of the client’s assets and especially their CGT treatment, the client might gift them now as PETs in advance of receiving the wife’s assets. Within the limit of the client’s NRB, assets pregnant with capital gain could be routed through a trust to the daughters.
The client is too old for a discounted gift trust to be employed (HMRC v Bower, 2008 EWHC 3105 (Ch)). Subject to investment advice he could invest some of his assets in a portfolio of shares on the alternative investment market (some would benefit from 100% BPR if owned for two years). If the wife held ISAs the husband can ‘inherit’ them by investing their value in addition to his £20,000 annual amount and AIM shares can nowadays be held in ISAs.’
The full article, published in Taxation issue 4869, is available on the Taxation website.
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