STUDY 1: Pam and George

Pam and George are in their 70’s and inherited a considerable cash sum from their  Uncle Arthur a few years ago. They know they will be unable to spend all of it as they were already financially comfortable. They are now worried because they want this money to be distributed amongst other family members as they don’t want it to be paid in inheritance tax on their death.

They simply want to give away the money in the most tax efficient way possible.

Advice:-

If a cash gift is made within 7 years of death then the value of that gift is included in the Estate for IHT purposes. This could increase the amount of potential IHT charged at 40%.

It would therefore be advisable to make significant cash gifts as soon as possible. If they do not wish to do this they could make smaller gifts each year. Using the annual £3,000 exemption each, they could gift up to £6,000 a year and this would not be included in their estates. There is also an annual small gifts to one person allowance which allows up to £250 to be paid to any number of individuals in any year. Gifts in consideration of marriage are also exempt, as are gifts to charities and recognised political parties.

If they would like to preserve some of the capital, as they may feel that any grandchildren are too young to receive significant amounts, then they could set up a Trust. Even under the new regime a Trust is often an efficient means of preserving the capital whilst retaining control. There may be some tax charges but these are significantly less than the one-off 40% charge and if the value of the Trust assets is kept below the nil rate band, these charges could be avoided.

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