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Estate Planning: The Do’s and Don’ts

Individuals consider estate planning for a variety of reasons. It may be to reduce the size of their estates for inheritance tax purposes or simply as a gift for their children or loved ones.

For some, in order to reduce their death estate, this may mean gifting property to children, grandchildren or relatives. This article focuses on the ‘do’s and don’ts’ of estate planning and provides a brief overview on some of the key factors to be aware of prior to making any gifts of property.

Gifting Property

Potentially Exempt Transfers

People often make gifts of property to relatives during their lifetime.

It should be noted that when lifetime gifts are made, a ‘seven-year clock’ begins to run on the specific gift. Consequently, if an individual were to pass away within seven-years of making the gift, then the gift is categorised as a ‘potentially exempt transfer’ (‘PETs’) which could be subject to inheritance tax.

Whilst there are potential bases for the gift to not attract or to only attract a small amount of inheritance tax (for example, it is worth exploring whether there is tapering relief available or a full nil rate band available), it is important to consider the timing of gifts and for people to obtain legal advice as to any inheritance tax implications.

It should be noted that whilst this article focusses on gifts of property, other gifts such as cash gifts can also trigger the seven-year clock and potentially be categorised as a PET.

Gift with Reservation of Benefit

A further inheritance tax implication relating to property arises in circumstances where property is gifted, but the donor (i.e., the person gifting the property) continues to live in the property and thereby retains the benefit. This is what is known as a “gift with reservation of benefit” (“GROB”) – a rule introduced by the Finance Act in 1986.

The rule was introduced to prevent individuals gifting property in their lifetime with a view to reducing their estate, but still retaining the benefit of the asset.

Where a donor makes a GROB and still retains the benefit within seven years of their death, HMRC would in most cases consider the whole of the gifted property to remain part of the donor’s estate for inheritance tax purposes. The donor may have gifted the property with the intention of reducing their estate for inheritance tax purposes but the fact that the donor was continuing to benefit from the asset in their lifetime will negate that planning.

There are, however, exceptions to the GROB rule, for example, if the donor gives away a share in their property but pays a full open market rent to remain in it. The circumstances of each individual needs to be considered carefully and it is for this reason that we strongly recommend independent legal advice is obtained before any disposal of assets.

How can we help?

It is very important to obtain legal advice relating to gifting of property and general estate planning, as to ensure that you are doing it in the most effective, legal way possible.

Freeths LLP has an extensive team of lawyers who can assist with providing estate planning advice, Will drafting advice and more.

We can ensure that the inheritance tax, capital gains tax and income tax implications of making a gift are considered, and that you achieve a practical result that will benefit you.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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