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Lexis+ AI
Jean-Yves Gilg

Editor, Solicitors Journal

So just what is allowed?

So just what is allowed?


The state is responsible for and consistently introduces tax planning schemes, so why isn't it playing a greater role in educating the public as to what is legal and what is illegal?

Following publication of his tax returns, the revelation that David Cameron received a £200,000 gift from his mother once again brings to the foreground the question of what amounts to legitimate tax planning.

In England, Wales and Scotland, everyone has an inheritance tax nil rate band - the allowance available before inheritance tax is a payable on an estate. The nil rate band is £325,000, having been set at that level since April 2009 and is frozen until 2017. Inheritance tax is charged at 40 per cent on the value of an estate over the nil rate band, subject to any exemptions and reliefs.

Inheritance tax was originally intended to affect the very wealthy, but rising property prices, particularly in London and the south-east, have made the tax a problem for more and more families; the value of the family home will invariably eat up the majority, or all, of the nil rate band in these areas. This is evident in the record inheritance tax receipts of £4.2bn that the government has forecast for tax year 2015/16.

It is for this reason that people often look for ways of reducing the size of their estate to mitigate their inheritance tax bill. Within the law, there are many avenues that are open to all by which this can be done.


Lifetime gifts have come under the spotlight. A successful gift allows the value of the asset to be removed from your estate for inheritance tax purposes, meaning a lower tax bill on death. But it is not quite as simple as handing over a cheque or a valuable painting. If there is any element of 'reserved benefit' in the gift, such as might be the case with a painting that you give away but retain at your house, it is not effective for inheritance tax purposes, and the asset will be treated as still part of your estate. You also have to survive seven years from the date of the gift in order for the full value of the asset to be non-chargeable at death.

Using lifetime gifts to reduce the value of the estate for inheritance tax purposes is not revolutionary or uncommon; it has been possible to do so since 1894. It is also not always about inheritance tax. Many people simply want to provide for their children during their lifetime to help them get onto the property ladder, to help with school or university fees for grandchildren, or simply to start passing assets down a generation if they are surplus to what is needed.

The benefit of the rules regarding normal expenditure out of income are often overlooked as another legitimate way to reduce your estate for inheritance tax purposes. It is possible, if you have surplus income, to give away the excess, provided you can demonstrate that your income exceeds your needs and a pattern of giving.

The gift of income will be automatically exempt from inheritance tax, without the need to survive seven years. Detailed records will need to be kept to demonstrate that the gifting is done on a regular basis. Additionally, gifts to charities, spouse and civil partners are exempt, as are certain gifts in consideration of marriage and small gifts of up to £250 to any one person per tax year. Not forgetting that each person also has an annual exemption of £3,000 that can be carried forward one year if unused.

The public's changeable court

There has been a huge crackdown on tax evasion by the government in recent years and now even legitimate tax planning is becoming publically frowned upon; but it serves to remember that the government has also encouraged inheritance tax planning over the past year with the introduction of the 'residence nil-rate band' to exempt up to £175,000 of the family home from inheritance tax from 6 April 2017, and the shelving of plans to review the use of deeds of variation for inheritance purposes.

The latter remains a legitimate and tax efficient way for a beneficiary of an estate to redirect an inheritance to someone they think is more deserving, without the need for that beneficiary to make a lifetime gift for inheritance tax purposes and worry about surviving the seven years.

Inheritance tax planning is available to all, has been done for over a century, and is not just the preserve of the rich and famous.

Caroline Cook is a senior associate at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser 

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