There has been much public scrutiny in the wake of the recent revelations regarding David Cameron’s personal tax affairs. In particular, he has come under criticism for having received a gift of £200,000 from his mother following his father’s death. A move that, it has been suggested, was a means of avoiding inheritance tax.
Gifting as a means of arranging ones affairs to mitigate inheritance tax is both entirely legal and a common means for people to pass on their wealth to the next generation tax free.
We need to be careful not to conflate an attempt to avoid inheritance tax with an attempt to evade inheritance tax. To avoid inheritance tax may sound sinister but actually just means to arrange your affairs, within the confines of the law, in such a way so as to mitigate your exposure to tax. To evade tax is illegal.
The rules around gifting are sanctioned by HM Revenue & Customs and can be found in the Inheritance Tax Act 1984. A person may give a gift of any value to another individual. This gift is called a “Potentially Exempt Transfer” or “PET” for short. Provided that the person survives for seven years from the date that the gift is given, the value of the gift will fall out with their estate for inheritance tax purposes.
Whilst it is worth scrutinising complex or aggressive tax planning arrangements where it can be suggested that avoidance is bordering on evasion, it cannot be suggested that parents wishing to gift their wealth to their children fall into such a category. Indeed, most parents want to provide for their children to whatever extent their personal circumstances allow.
For more information on the rules around gift giving and inheritance tax, please contact a member of our private client team.
