George Hay Chartered Accountants were one of the first accountancy firms in the country to obtain a licence to carry out non-contentious probate work. In our monthly column, we give you an insight into the process and provide an update on what is happening in the world of probate and estates.

At the beginning of the month, it was reported that 2,000 families had been ordered to pay back millions in Inheritance Tax (IHT) for falling foul of the “Gift with Reservation” (GWR) rules.

I am not sure how anybody can pay IHT back, as they never received it in the first place, but the GWR point is of interest.

In 1986 when IHT was introduced, replacing Capital Transfer Tax, no IHT was payable on lifetime gifts, except for gifts to certain trusts. It was, therefore, necessary to introduce anti-avoidance provisions to stop people “pretending” to give assets away.

The official definition is “to qualify as a lifetime gift, the gift must be to the exclusion or virtual exclusion of the donor”.

Most of the challenges referred to above relate to houses that somebody has passed to their children whilst continuing to reside there. 

Clearly the gift will not have been to the exclusion of the donor and so will remain part of their Estate on death. 

The only way that person can make a valid gift, taking the property outside of the estate, is to pay a market rent to their children for occupation of the property.

Some people say, “can I pay the rent to my children, and they give it back?”. Two points – yes, they can, but only if they want to and you cannot make them and, secondly, the children will have to declare the rent on a Tax Return and of course pay tax on the amount received.

Such a transfer is also a Capital Gains Tax (CGT) disaster. Whilst the gift is ignored for IHT purposes, it is not for CGT purposes.

As an example, parents give the house to their children, carry on living there until their death and do not pay a rent.  

For IHT purposes, the house belongs to the parents and is included in their Estate and subject to IHT.

The children then sell the house. However, as they have never lived there, they do not qualify for private residence exemption, and they will need to pay CGT on the increase in the value of the house from the date the parents gave it to them, to the date of eventual sale. A double whammy.

It does not just have to be a private residence that is a GWR.  A holiday home frequented rent free by the donor can be caught. A valuable picture on the wall in the lounge and seen every day by the donor would be caught.

There are ways for some tax mitigation mainly on the CGT side but, as the newspaper article I happened upon stated, 2,000 people failed to take proper advice and so have paid the price.

To talk to one of our experts about undertaking Inheritance Tax planning contact us on 01480 426500, or fill in our online enquiry form.

Authored by Director of GH Probate Ltd., Barry Jefferd.

Our Probate service is provided through GH Probate Limited. GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.

Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales.

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