Last month I wrote here about the ‘sandwich generation’. We are often approached by members of this group of people for advice relating to sums left to them by parent which (or some of which) they want to pass on immediately to their own children who are starting out in life and need the money more than they do. How best to go about this?
It is possible for a parent to make a gift to a child, but, in this situation, there can be a downside of doing things this way because Inheritance Tax is charged by reference to very specific moments in time. If A inherits from his mother and immediately passes on what is due to him to his own children by way of gift, then, if A dies within the next seven years, the value of what he was left by his mother but gave away will be added into the value of his own estate for the purposes of calculating the Inheritance Tax due on his own estate – so although he has never had the money in his own hands, to the extent that it pushes the value of A’s estate over the Inheritance Tax threshold tax will be levied on it at 40%. And in addition, A may incur a Capital Gains Tax liability on what he has given.
Some people ask us if they can ‘disclaim’ what is left to them in a Will and again that is possible and would overcome the Inheritance Tax and Capital gains Tax problems which could have been created for A by a gift – but where the sum disclaimed ends up is not under A’s control. It will depend entirely upon the wording of the Will in which the bequest was made– or if there was no Will, upon the laws of intestacy – and, in the situation above, that is unlikely to be with A’s children.
There is a third, simple way of achieving what is required which avoids these problems. The law permits the terms of a deceased person’s Will, or the way in which the laws of intestacy dictate the ultimate destination of their assets, to be changed by way of a Deed of Variation, under the terms of which a beneficiary (A in the examples above) may redirect what he or she was to have received elsewhere (in A’s case to his children). In this case the gift which was to have been received by A is re-directed to his children in the Deed and the effect for tax purposes is as if A had never been a beneficiary and instead his children had. So, no seven-year problem and the potentially undesirable Inheritance Tax and (in most cases) Capital Gains Tax consequences of a gift or disclaimer are avoided.
There are other situations in which a Deed of this kind can be useful. They include ensuring that a variety of Inheritance Tax allowances (most commonly, and often crucially, the new ‘RNRB’ which increases the amount of a person’s Inheritance Tax exemption by £125,000 if he or she leaves their interest in the family home to their direct descendants - but also Charity, Agricultural Property and Business Property reliefs) are used to maximum effect.
There are, as always, rules about how such a Deed should be set up to be effective for tax purposes.
• The Deed must be made within two years of the date of the death of the deceased. • The person who wishes to amend the terms of the Will must sign the Deed and can only vary what it left to them; they cannot amend the terms under which someone else named in the Will inherits. • The same gift cannot be varied more than once (so it is important to get it right first time around!) • and a Deed cannot be made for consideration from an outside source – in other words, the original beneficiary (A) must not receive payment from outside the estate for giving up his entitlement.
If you find yourself in the position of inheriting and are not sure of the tax implications for you or other members of your family of doing so see a solicitor and get advice.
Helen Starkie (Sep 2018) Bath Life