The Jimmy Carr Debate
Leaving aside the moral debate about Jimmy Carr, K2 and tax avoidance let’s bring you some less controversial tax planning around the subject of death which will happen to all of us at some stage.
Estate planning is not simply about Inheritance Tax (IHT).
Bear in mind that in your eagerness to avoid IHT you may trigger a liability to Capital Gains Tax (CGT).
When planning to avoid Inheritance Tax (IHT) the general view and practical approach is to reduce the value of your estate that is subject to IHT. The easiest and simplest way to do this is to give away as much wealth as you can as soon as you can. Assuming that you survive for a further seven years, then the value of that gift will fall out or your estate and you have potentially saved 40% of its value.
Sounds good so far but be careful for the gift of an asset to a connected person, except your spouse, will be treated by the taxman as a deemed sale at market value. So maybe you have a holiday cottage in the beautiful county of Northumberland that you have owned for years and maybe paid £30,000 for in 1985 but no longer need, a simple gift to the children or grandchildren of the asset now worth £130,000 will create a capital gain of £100,000 (OK adjusted for acquisition and disposable costs and maybe some improvements). So a potential tax bill of 28% of the gain. Ouch!. Even worse were the donor not to survive the seven year period the estate could potentially be looking at a further 40% IHT. Double ouch!!
Forgive for the slightly morbid nature of deathbed planning but tucked away in the legislation is a wonderful rule the enables certain gifts to be ignored for CGT .In case you were not aware, gifts from a will are not subject to CGT.
Deathbed gifts, or to put it another way gifts made in contemplation of death, known as “donatio mortis causa” (DMC), count as transferred at the date of death.
For a gift to be considered as DMC three factors must be present at the time:
- it must be made in contemplation of death but not necessarily expectation. For example, someone undergoing a serious operation might contemplate the possibility of death even though they hope and expect to survive
- the gift must only become a permanent one where the person making the gift dies. In other words they have the right to take back the property in the event they survive
- the assets in question must be passed to the beneficiary of the gift, a mere promise is not enough; there must be physical transfer. Transfer is effected by delivery of the actual property and must be made to the donee, or someone on their behalf. The donor must part with control and not merely physical possession of the property. For example, the delivery of title deeds (kept in a steel box, the key to which had been given by X to Y during her visits to the hospital during X’s illness) amounted to X’s parting with control over the house. Or A’s terminally ill father, B, told A to keep the keys to B’s car, which A used regularly was seen as effective delivery.
As always with estate planning it is a difficult and sometimes a very emotive subject, but bear in mind in trying to dodge the issue of estate planning could leave your beneficiaries with an unexpected double tax charge and the last thing you want is the taxman snapping at your heels having lost a loved one.
As ever with tax planning seek professional advice as everyone’s circumstances are different.
Finally never forget that tax avoidance is legal. Any professional advisor not doing their utmost to provide their client with opportunities to legally reduce a tax liability has failed in their professional duties. It is for the client to decide with their moral compass whether they wish to pursue that route.