Understanding Gifts and Inheritance Tax (IHT) can be daunting, especially when dealing with Potentially Exempt Transfers (PETs).
Knowing the specific rules can help save significant tax liabilities.
(Read Time: Approx. 2 minutes)
Topics Discussed:
- The impact of gifts on inheritance tax (IHT)
- Utilising Business Relief (BR) and Replacement Property rules
The Issue
Gifts are typically excluded from a person’s estate for inheritance tax (IHT) if they survive seven years from the date of the gift.
These gifts are known as ‘potentially exempt transfers’ (PETs).
If the individual dies within seven years, the gift falls within the IHT scope.
Gifts over the nil rate band of £325,000 are taxed at 40%, with possible tapering relief if more than three years have passed since the gift.
Gifts of shares in trading companies qualifying for Business Relief (BR) generally escape IHT, even if the transferor dies within seven years, provided the shares are held at the date of death.
However, if these shares are sold before death, the full value becomes chargeable to IHT unless the proceeds are reinvested in Replacement Property within three years of disposal.
Replacement Property Rule: A Lifeline
The Replacement Property rule offers a potential rescue even after the donor’s death.
If the sale proceeds from the original asset are used to acquire Replacement Property, such as shares in another trading company or an AIM portfolio, within three years, the PET may still avoid failure.
Example Scenario:
- On 31 January 2018, Chris gifts his daughter Brooke shares worth £1.5 million.
- On 31 January 2021, Brooke sells these shares for £2 million.
- Chris dies on 30 November 2022, seemingly triggering a chargeable gift.
- Before 31 January 2024, Brooke invests the £2 million in AIM portfolio shares.
In this scenario, Brooke’s investment in AIM shares saves £360,000 in IHT after 40% tapering relief.
Even for risk-averse individuals, this strategy is attractive as there is no minimum holding period for AIM shares specified in legislation.
However, HMRC might scrutinise and take a second look at quick acquisitions and disposals under anti-avoidance laws.
Summary
Situations like this are more common than one might think.
Illnesses prompting business disposals can lead to capital gains tax and IHT complications.
Gifts in Inheritance Tax are a strategic method for saving money, but can be risky.
Even the most risk-averse beneficiaries should consider the benefits of strategic investments that could lead to significant IHT savings.
Saara at Help Me Legal offers the expertise and guidance necessary to help you make informed decisions about your estate.
Facing problems with your company due to illness? Don’t risk unnecessary capital gains tax and IHT complications.
Call Saara now at 01772 282768, chat with her 24/7 on WhatsApp at +447816848188 for your urgent needs, or fill out our contact form on our website to schedule your consultation.
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