Solicitors in Westminster, London
No Time to Die - Financial Advice from 007
“Get rid of it or give it away before you go”: A public display of virtuousness or sound financial planning advice?
By Ben Nichols
In an interview by Candis magazine, Daniel Craig described the idea of large inheritances as “distasteful” and said he was not planning to leave “great sums to the next generation”. His philosophy, he said, is to “get rid of it or give it away before you go”.
Regardless of the reasoning behind the actor’s philosophy, his advice to get rid of or give away his fortune before he goes is notable from an estate planning perspective. When done properly, there can be significant inheritance tax (IHT) advantages to reducing the size of one’s estate during their lifetime. We advise on all aspects of estate planning and frequently assist our clients in managing their IHT bill.
IHT is a one-off tax paid on the value of a deceased person’s estate above a set threshold – currently £325,000. This is known as the “nil-rate band” and is the amount which can pass to your beneficiaries without creating any IHT liability. At 40%, the UK’s IHT rate is one of the highest in the world. Taking action early and reducing the size of your estate is one of the ways in which you can make sure more of your money goes to your beneficiaries and less to the tax man.
There are certain types of gifts that are exempt from IHT and recognizing these can be a useful way of managing your IHT bill.
Gifts to individuals totalling not more than £250 per person per tax year are exempt from IHT. This means that a person can effectively reduce the size of his or her estate by making a series of gifts to different persons of up to £250 each throughout the course of the tax year. If a gift to a particular individual exceeds £250, then the exemption will not apply to any of that gift (not just the amount in excess of £250). Where a gift is under £250, it is not possible to carry any unused portion forward to the following tax year.
Gifts on marriage or civil partnership
Lifetime gifts in the event of marriage or registration of a civil partnership are exempt and vary depending on the relationship between the donor and the individual. A parent can give a child up to £5,000, whilst grandparents and great-grandparents may gift up to £2,500. A maximum sum of £1,000 may be given by any other person. Any such gift must be made before or at the time of the ceremony. The exemption will fail if the ceremony does not ultimately take place.
Lifetime gifts, which do not fall within any of the other exemptions, are exempt up to the value of £3,000 per tax year. If the annual exemption is wholly or partly unused for a particular tax year, that unused portion may be carried forward to the next tax year only. The annual exemption may also be used to exempt from IHT the first £3,000 of a larger gift.
Potentially Exempt Transfers
The “seven-year rule” exists to prevent people from avoiding IHT simply by giving away all their money on their deathbed. Before looking at the seven-year rule, it is important to understand that certain gifts can be subject to IHT.
Unlike the gifts mentioned above, which are immediately tax-free, some gifts will be considered as “potentially exempt transfers” (PETs). PETs are called "potentially" exempt because the transfer will only be tax-free if the donor survives seven years from the date it was made. If the donor fails to survive the seven years, the gift becomes chargeable and will use up all or part of the donor's nil-rate band. This is what is meant by the seven-year rule.
The longer the donor survives after making the gift (subject to surviving at least three years), the lower the IHT liability. This relief is called "taper relief" and the rate applied is determined by the timing of the gift.
PETs are an important part of estate planning. When planned correctly, PETs can be an effective way of removing value from your estate, especially since there is no limit on how much you hand over. As their name suggests, these are only potentially exempt from IHT and timing is crucial.
Gifting to Charity
One final way to reduce the size of your estate is by making donations to charity. This is particularly tax effective since not only are the value of the donations removed your estate, but if the donations are large enough – at least 10% of your net estate – the rate at which IHT is levied on the remainder of your estate is reduced from 40% to 36%.
Whilst you may not have as much to give away as the 007-star, inheritance on a more typical scale is becoming more of an issue. Over the next twenty to thirty years, a record £5.5 trillion is set to be transferred between the generations. Without proper planning, IHT can cost families thousands of pounds and result in added stress for executors. We can help you to utilise the tools available and navigate the complex tax rules to manage your IHT bill and make sure more of your money passes to the people you want in the most tax-efficient way.
If you would like to discuss anything set out in this article, please contact a member of the private client team. Ben is a solicitor within the private client team and deals with all aspects of private client law.