Anne’s Approach to Inheritance Tax (IHT) Mitigation.

In an attempt to beat the ‘tax man’, we saw reported last week that Anne Robinson, best known for hosting The Weakest Link, and a brief stint on Countdown (a word very important to the planning in question), has reportedly decided to ‘give away’ her estimated fortune of £50 million to her daughter and grandchildren.

In the UK, on their death, each individual is entitled to an allowance of £325,000 free of inheritance tax (the “Nil Rate Band”) – subject to any gifts they have made in the last 7 years. There is also a “Residence Nil Rate Band” which allows their estate to benefit from an additional £175,000 allowance, provided they pass property to their lineal descendants. This additional allowance does however taper away if the individual’s estate is over £2m. As Anne Robinson is not currently married, no spousal exemption will apply to her estate.

Under the current rules, without implementing any planning, Anne would be able to pass £325,000 to her beneficiaries without any inheritance tax being due; anything above this would be taxed at 40% unless the asset in question qualified for tax relief.

It doesn’t take Carol or Rachel in the “numbers corner” to work out that Anne’s estate would face a hefty tax liability – in the region of around £20 million based on her estimated £50 million estate.

In light of this, Anne has decided to gift the entirety of her wealth during her lifetime, to minimise the amount of IHT that may be payable on her death. Whilst gifting monies can be an incredibly effective form of IHT mitigation, there are extensive rules around gifting which must be considered. Query therefore, whether the weakest links associated with lifetime gifts have truly been taken in to account.

The 7 Year Countdown Conundrum

Gifting is one way in which individuals are able to reduce their IHT liability. Some gifts will be tax free, such as gifts to charity, whilst the majority of other forms of gifting will remain subject to IHT for 7 years after the gift is made.

If you do make a gift out of your estate, and survive the full 7 years, the entire value of this gift is no longer considered to be part of your estate, and therefore will be outside of the scope of IHT. If you pass away within 7 years of making the gift, however, IHT may be applicable and the amount of tax payable on the gift will depend on how much time has passed since the gift was made.

The result of these rules are such that if Anne is to pass away within the next 7 years, the tax that she was trying so hard to avoid, would nevertheless fall due, and Robinson’s family would be exposed to paying the IHT on the gifts that they had received. These gifts would also form part of their own estates for IHT purposes, leaving them open to a form of double taxation on their own demise. There may well be reliefs available in certain circumstances, and expert advice would need to be taken by her beneficiaries’ own personal representatives at the time to ensure the appropriate relief, such as Quick Succession Relief, is claimed.

The 7-year rule highlights the importance of considering IHT planning from the outset, and of course we do not know whether Ms Robinson has factored in such risks and insured her estate against such a scenario. The 7-year rule also inevitably makes matters more difficult the later in life someone begins their efforts to mitigate against IHT, given the requirement to live beyond this period of time.

Deprivation of Assets

Another aspect of such significant gifting that needs to be considered is how such gifts could be clawed back from a local authority, should the person making the gift need to receive care in later life. Making such gifts with care a foreseeable possibility can be seen as an intentional ‘Deprivation of Assets’; local authorities are becoming increasing aware of this and have the ability to pursue the recipient of the gift to pay those monies back.

There is no set time period for which a local authority can look back, meaning that it does not matter whether an individual gifted assets two weeks before going in to care, or several years prior.

Further Pitfalls of Gifting

£50m is a significant amount of money to simply give away, and for IHT purposes, Anne would have to truly give away this money, meaning that she has retained no control or interest in the money whatsoever. There is now a risk that such wealth could be exposed to matrimonial proceedings should one of the beneficiaries get divorced. In the event that a divorcing spouse successfully claims 50% of the wealth, without any sort of pre or post-nuptial planning, Anne’s intended beneficiaries could end up with less than if Anne had instead paid “only” 40% to HMRC on her death!

A further issue is that Anne has not altogether “beaten” HMRC, but merely passed the liability on to the next generation. As and when her beneficiaries pass away, their estates will still be liable to IHT on their own fortune. Depending on the assets Anne has given away, there may also be a substantial Capital Gains Tax liability payable now on the gifts to the beneficiaries. For example, if property or other assets have been given away, which have gained in value during Anne’s ownership, then Anne’s CGT bill may look like quite the opposite of “beating the tax man”.

Professional Advice

We can only hope that Anne Robinson received proper advice before gifting away her fortune, and had the opportunity to weigh up the options and the range of consequences of each. Robinson’s approach to inheritance tax planning may not be the best for everyone, and so it is vital to seek professional advice early on in the process. There is no one-size-fits-all solution to mitigating inheritance tax liability and it will be important to consider individual circumstances to create a tailored and tax efficient plan.

Here at JMW, we specialise in all form of IHT planning and mitigation, and are able to advise on and offer a range of proposals that might suit you and your family.

Should you be considering IHT planning, or implemented planning in the past that may need to be reviewed, please contact a member of our Private Client team who can guide you throughout the entire process.