By Anthony Tahourdin, www.herrington-carmichael.com
When we speak to people about inheritance tax, they will often tell us about the things that they have done to avoid this tax, or their understanding of the tax. While there is little doubt that some people have a good understanding of the tax, it is frighteningly common to discover that there are serious misconceptions. This was recently reinforced by the outcome of a survey commissioned by HMRC, which showed that many of us make quite substantial gifts during our lifetime but very few had any significant knowledge of the relevant rules and how these gifts might or might not be taxed.
In the circumstances, we thought as a public service we would debunk a few of the more common myths that we hear.
Myth No 1. You can only give away £3000 a year.
Incorrect. Actually, you can give away as much money as you want, but if you give away more than £3000 in any year then unless you have alternative exemptions available, the gifts might be subject to inheritance tax if you were to pass away within seven years.
Myth No 2. You have given each of your three children £30,000 and you don’t expect to live seven years, but if you live for five years the gift is tapered and tax reduced.
Unfortunately not. Taper relief does not reduce the value of a gift, instead it reduces the tax on a gift. This means that to benefit from taper relief you have to make gifts which give rise to tax, in other words they have to exceed £325,000. For someone who can afford to give away such large sums of money, living five years will indeed reduce the tax payable by 60%.
Myth No 3. You sold your holiday home to your son for £10,000, that way it is not a gift.
Incorrect. A sale undervalue is a gift of the amount by which the value of your estate is reduced by a transaction. If the holiday home was worth £200,000, then the sale was a gift of £190,000. Incidentally, this myth also crops up in relation to Capital Gains tax and a sale undervalue does not wipe out that tax either.
Myth No 4. Your house is an old farmhouse and you have a couple of fields and an old farmyard. You run a small do it yourself livery and your wife breeds one or two horses a year. This means you should get agricultural property relief on the house and the fields.
Probably not. Agricultural property relief is only given for what is called the “intensive production of crops or foodstuffs”. Horses do not generally come within this definition and livery very rarely qualifies for any exemption. Occasionally it is possible to claim agricultural or business relief for a stud farm, but occasional horse breeding will not count. A farmhouse is only eligible for relief if it is associated with a working farm, and even then only partial relief may be available.
Myth No 5. You run a building company but now that you are retired most of the company’s work and income is derived from a couple of buy to lets. You should be able to get business property relief for the company.
Almost certainly not. A building company would usually qualify for business property relief, provided that the majority of income came from the building operations. However, a buy to let business is considered to be an investment business and this does not attract business property relief. If the business comprises partially building and partially investment operations then HMRC will normally look to see what the biggest source of profit is, and if it’s the rental income then business property relief is lost.
Myth No 6. You can put your house into a trust and it will protect it from nursing home fees and take it out of your estate for inheritance tax purposes after seven years.
Almost certainly not. Trusts of this sort, designed to protect against nursing home fees, are notoriously dangerous. They don’t necessarily provide protection against nursing home fees because they may count as what is called “Deliberate deprivation of Assets” which can be challenged.
For the purposes of inheritance tax they are a potential disaster. Firstly, inheritance tax may be payable on the creation of the trust if the value of the house exceeds £325,000. The tax is payable at 20% on the excess over £325,000 and further tax is payable every 10 years at a lower rate. Secondly, assuming you continue to live in the house, this is what is called a “gift with the reservation of benefit”. For the purposes of inheritance tax, such a gift is ineffective therefore inheritance tax would be due on the gift even if you continue to live for seven years, but it is effective for all other purposes. This is the ultimate disaster and can result in extra inheritance tax and capital gains tax being payable.
These are a few of the common myths, for further myth busting and reliable advice please contact a member of the private client’s team. Inheritance tax is always on our agenda.
Anthony Tahourdin Partner,
Office – 0118 977 4045
Direct – 01276 854 947
Anthony is a Partner in the Private Client Department. He joined the firm in 1999 from a London practice where he headed up the Probate Department.
Anthony advises on all areas of Private Client law but his principal interest is in the administration of Trusts and Estates, including both pre and post-death tax planning. He has over 40 years’ experience in dealing with estate administration and he regularly advises on complex estates.