Reducing your Inheritance Tax Bill: Family Maintenance (Gifts Out of Capital)

Giving away capital up to the value of your annual, personal allowance (currently £3,000 per annum or £6,000 if you have made no gifts in the previous tax year) is a neat and non-controversial way of reducing your inheritance tax (IHT) liability. Usually, if you give away capital in excess of your personal allowance, then that gift is referred to by HMRC as a ‘transfer of value’. Depending on the recipient, that transfer may incur an immediate charge to IHT, or it may incur a potential charge to IHT if you die within 7, and in certain circumstances 14, years of making the gift.

However it is possible, in certain circumstances, to give away capital of larger amounts to family members without incurring any immediate or potential inheritance tax liability. This article highlights the circumstances in which such payments can be made and to whom:

1) Spouses / Civil Partners – In the same way that transfers between spouses are exempt from Capital Gains Tax (CGT), so too are they exempt from IHT provided they are for the maintenance of your spouse.

2) Children (including step-children, illegitimate children and adopted children) – As long as your child is under the age of 18 or remains in full time education (if over that age) you can transfer capital to them so long as it is for their maintenance, education or training. Technically speaking, these gifts can be made to an 18 year old who has left full time education, provided that the year (ending 5th April) is the same as that of their 18th birthday.

3) Other Children – If a child is not in the care of their parents, it is possible to make capital provision for their maintenance, education or training prior to them attaining the age of 18. It is possible to provide for them after that time as long as:

3.1 They remain in full time education
3.2 The child was in your care for substantial periods of time prior to turning 18

Again it is possible to make these gifts in the same year (ending 5th April) of the 18th birthday.

4) Dependant Relatives – There are two categories here:

4.1 Relatives of you or your spouse who are incapacitated by old age or infirmity from maintaining themselves; or
4.2 Your or your spouse’s mother and father

If a person falls within either category, you can make provision for them for both care and maintenance as long as such provision is reasonable. This last category is therefore wider than the previous categories, allowing payments for the purpose of care. However it introduces a condition of reasonableness, absent from the other catagories.

As well as giving money directly to individuals, it is also possible to transfer money into a trust for the purposes and persons identified above. As long as the amount transferred into the trust is proportionate to the estimated needs of the beneficiary / beneficiaries then the transfer should be exempt. However you should take specialist advice if taking this course of action to ensure that your trust complies with the relevant tax legislation.

Finally, whilst it is often obvious what the purpose of a capital gift is, it is always advisable to record your intentions when making such gifts in case there is any query by HMRC at a later date. The recent case of McKelvey v HMRC [2008] highlights some of the issues raised above:

In this case a terminally ill daughter (‘the Deceased’) had lived with and cared for her disabled mother. Before her death she gave two investment properties to her mother, intending that they would be sold and the proceeds used to pay for care after her death. In fact the properties were not sold as other arrangements were made for the mother’s care.

Nevertheless the Deceased’s personal representatives claimed that these were exempt transfers which should not form part of the Deceased’s estate for IHT purposes. HMRC contended that, as the properties were not actually used to pay for care, the exemption could not be used.

The Court found that the important factor was the intention when making the gift. The intention here had clearly been to provide for the mother’s care. The transfers were therefore exempt to the extent that they were reasonable. In this case the Court found that £140,500 of the £169,000 transferred was reasonable. The balance was therefore chargeable to IHT.

Please do not hesitate to contact Alex Stanier in our Private Client department if you need any assistance with your estate and inheritance tax planning.

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