Over the years, I have made generous financial donations to my three daughters. The oldest benefited many years ago, the youngest two more recently. If I die (I’m 82), will the inheritance tax fall on the gifts to my younger daughters or on my estate as a whole? I’m afraid this could cause friction if liability is not shared between my three daughters.
Lilly Whale, attorney on the private client team at Goodman Derrick, a London law firm, says individuals are increasingly choosing to freeze the size and scope of their estate by making significant life gifts. However, many are understandably concerned about the tax implications of this.
A carefully planned lifetime gift can be a useful tool for lowering Inheritance Tax (IHT) upon death, but the giver may not want his unwitting beneficiary to take on the responsibility of handling any tax liabilities if he dies too soon after donating.
You did not specify exactly how much you gave, nor when the gifts were made. For the purposes of HMRC, they are potentially exempt transfers (PETs); provided you survive the gifts for seven years, they are fully exempt. Otherwise, the gifts become taxable and consume all or part of your zero rate (currently £325,000). In fact, a failed PET could mean your estate is liable for more IHT.
The standard legal position is that IHT on a failed PET must be paid by the gift recipient. For example, if you gave £300,000 to your second daughter on day one, then £300,000 on day two to your third daughter, and die a month later, the zero rate – assuming your first daughter’s gift is outside the period of seven years falls — will use up the value of those gifts. This means that £275,000 of the second gift becomes taxable.
As IHT is currently charged 40 per cent, it would be up to your third subsidiary to settle the liability of £110,000 with HMRC within six months of your death.
This can be an unappealing prospect for everyone involved. If you want to guarantee equality regarding the gifts to your three daughters, then you may want to include a clause in your will stating that any IHT payable on a failed PET must be paid from your remaining estate rather than by the recipient of the gift – meaning none of your daughters are personally liable for the IHT as recipients.
So assuming they inherit your estate in equal parts, your three daughters would receive an equal but smaller part of your estate, less any IHT settled from residue.
Since the zero rate band is used for taxable transfers in chronological order, the earliest failed PET will benefit first. There are other options you may want to explore, such as including a discretionary trust in your will to ensure that the zero-rate band is not exhausted by one gift; or taking out insurance to cover IHT if the estate does not have enough money upon your death. Your lawyer or financial advisor can advise you further about your options.
During the pandemic, my private accountant advised me to move money from one bank to an investment opportunity and as a result I lost money. Is there anything I can do?
Sinead O’Callaghan, partner at law firm Cooke, Young & Keidan, says that given the volatility of a whole spectrum of investments during the pandemic, it seems inevitable that accountants and investment advisers will receive more and more complaints and claims about advice they have given in relation to investments that have fallen in value.
Individuals may have complaints that range from not understanding the investment criteria and risk appetite to unsuitability or failure to advise on the risks and implications of the investments in question.
The good news is that you may be able to recover your losses if your accountant or investment adviser has given negligent advice – has not advised you to a reasonable professional standard – or if they have not followed the relevant regulatory rules in their dealings with you.
Your first point of contact should be to look at the contractual agreement you have entered into to see if there is a prescribed complaint handling procedure for you to follow. If so, consider seeking legal advice in connection with preparing your complaint or claim, or seeking accounting advice to help you quantify your losses. This is probably more important for more complex investments and where greater losses have been incurred.
If there is no complaints procedure in your agreement, you must nevertheless formally report your complaint or claim to your accountant or investment adviser. This can be done in person or through a letter from lawyers. Apart from that, it might be worth doing some research into the investments that failed and whether they caught the attention of the press. It is possible that action groups have already been formed that you can join. These can be a useful source of information.
If a formal notice and any subsequent negotiations do not lead to a satisfactory settlement or solution, the next option is to seek redress through court or through arbitration proceedings if provided for in your contractual agreement. At this stage, if you have not already done so, it is wise to seek legal advice on the merits of your claim and the consequences of initiating legal proceedings.
If the merits are not sufficient to justify legal or arbitration proceedings, some other possible options for those concerned are to lodge a complaint with the UK Financial Conduct Authority, the Association of Certified Chartered Accountants, or the Institute of Chartered Accountants in England and Wales. Again, you should seek legal advice to determine which of these avenues, if any, are open to you, depending on the particular circumstances.
The opinions expressed in this column are for general informational purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from reliance on answers, including loss, and exclude liability to the fullest extent.
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I divorced my ex-wife in December last year and we are in the process of dividing our assets. We have agreed that I will transfer half of my share of the family home to her so that she can sell the property to pay her legal fees and buy somewhere else where it is easier to live. In the meantime, she will transfer her shares in the family business that my father started to me. This arrangement makes sense for our personal circumstances, but also for our tax obligations?