Legally avoiding Inheritance Tax
TV personality Anne Robinson made headlines last year for legally avoiding Inheritance Tax (IHT) by gifting her £50 million estate to her family. But how did she do it? This article explores the UK’s inheritance tax rules, the seven-year gifting rule, and the potential risks of estate planning strategies.
Understanding UK Inheritance Tax
In the UK, individuals are entitled to an allowance of £325,000 free of inheritance tax, this is known as the “Nil Rate Band.”
Additionally, there is a “Residence Nil Rate Band,” which allows an extra £175,000 allowance if the estate includes property passed to lineal descendants. This additional allowance tapers away for estates over £2 million.
Given Anne Robinson’s marital status, she is not eligible for a spousal exemption.
Without any planning, Anne could pass on £325,000 without IHT, but the remainder of her estate would be subject to a hefty 40% tax rate.
For her £50 million estate, this could result in a tax liability of around £20 million.
To mitigate this, Anne opted to gift her wealth during her lifetime.
The 7-Year “Countdown Conundrum”
Gifting assets is a popular method to reduce IHT liability.
Gifts to charities are tax-free, while most other gifts are subject to IHT if the donor passes away within seven years of making the gift.
If the donor survives the full seven years, the gift is excluded from their estate for IHT purposes.
However, if Anne passes away within seven years of making these gifts, the tax she sought to avoid would still be due, potentially leaving her family with a significant tax burden.
The Importance of Early Planning
The 7-year rule underscores the need for early IHT planning.
The later in life these efforts begin, the more challenging it becomes to avoid IHT due to the necessity of surviving the seven-year period after making gifts.
The Broader Context of UK Inheritance Tax
In the UK, inheritance tax thresholds have remained unchanged since 2009.
If adjusted for inflation, the £325,000 threshold would be around £546,000 today.
The government collected £0.7 billion from inheritance tax in the first month of the 2024/2025 tax year.
That was £85 million more than the same period in the previous year.
This trend is expected to continue, as the Chancellor has announced that the threshold will remain frozen until at least April 2030.
Potential Pitfalls of Gifting Assets
While gifting assets can be an effective strategy to reduce IHT, there are several potential pitfalls in addition to the “7-year rule” mentioned above.
1. Capital Gains Tax (CGT) Charge
When you gift assets to someone close, like a family member, it’s not just a warm and fuzzy gesture.
The taxman sees this as a disposal, which can trigger an immediate CGT charge.
Translation: you might have to fork over some CGT right when you hand over that gift.
2. No CGT Uplift
Typically, when you hold onto assets until you pass away, their base cost gets a nice bump up for CGT purposes, which can slash the CGT liability for your heirs.
But if you gift those assets and don’t make it another seven years, your estate misses out on that CGT uplift.
The result? Your estate could owe more in taxes than if you had just held onto the assets.
3. Gift with Reservation of Benefit
Let’s say you gift a property but continue living there rent-free.
Guess what?
That property will still be counted as part of your estate for Inheritance Tax (IHT) purposes.
Thanks to the “gift with reservation of benefit” rules, if you keep benefiting from the assets you’ve gifted, there could still be a tax liability.
4. Value of the Gift
For IHT calculations, it’s not just the value of the gifted asset but the loss to your estate that’s considered.
This nuance can make it tricky to assess your estate’s true value and tax liability.
5. Divorce Risks
Gifting assets to your kids sounds great until they divorce.
Those assets can get sucked into the divorce settlement vortex, potentially ending up with their ex-spouse.
6. Access to Assets
Think twice before you gift away your assets.
Once they’re gone, so is your control and benefit from them.
This could have a material impact on your financial security and income down the road.
Understanding UK Inheritance Tax
FAQs
The Nil Rate Band (NRB) is the threshold below which no Inheritance Tax (IHT) is payable.
It currently stands at £325,000.
Any estate value above this amount is typically subject to a 40% tax rate.
The Residence Nil Rate Band (RNRB) is an additional £175,000 allowance that applies when a property is left to direct descendants (children or grandchildren).
However, it starts tapering away for estates valued over £2 million.
Spouses and civil partners can transfer assets IHT-free if both are UK-domiciled.
For UK and non-dom spouses, transfers up to £325,000 are exempt unless the non-dom spouse elects to be treated as UK-domiciled.
From April 2025, a non-dom spouse will be able to elect to be treated as a long-term resident, with the election lasting until they’ve been non-UK resident for 10 years.
This adjustment means more careful planning will be needed for cross-border couples.
Gifting assets during your lifetime can help reduce the value of your estate for IHT purposes.
However, the donor must survive for seven years after making the gift; otherwise, it may still be subject to IHT.
If the donor survives for seven years after making a gift, the gifted asset is not counted as part of their estate for IHT.
If they pass away within seven years, the tax liability is calculated on a sliding scale known as taper relief.
Beyond the 7-Year Rule: How the 14-Year Rule Impacts Your IHT Planning
Yes, gifting assets can lead to unexpected tax consequences, such as:
Immediate Capital Gains Tax (CGT) liability.
Loss of CGT uplift for heirs.
Continued tax liability if the donor benefits from the asset (Gift with Reservation of Benefit rules).
Potential loss of control over gifted assets.
When assets are gifted, they may be subject to CGT, as HMRC treats it as a disposal.
This could create an immediate tax charge, unlike assets inherited upon death, which benefit from a CGT uplift.
If a person gifts an asset but continues to benefit from it (e.g., gifting a home but living in it rent-free), the asset is still counted as part of their estate for IHT purposes, potentially leading to tax liability.
The gift that keeps on taking: Understanding gift with reservation of benefit rules
Possibly.
Even if you now live overseas, if you have been UK-resident for 10 out of the last 20 tax years, you’ll be treated as a long-term resident.
Long-term residents will be liable for UK IHT on their worldwide assets.
Early planning is crucial. Options include:
Making lifetime gifts while considering the 7-year rule.
Using trusts and pension funds strategically.
Seeking professional financial advice to navigate tax rules effectively.
The Bottom Line
Anne Robinson’s strategic gifting to avoid inheritance tax highlights the importance of proactive estate planning.
The complexities of the UK’s inheritance tax laws and the potential pitfalls of gifting emphasize the need for careful planning and professional guidance.
As inheritance tax thresholds remain frozen and tax rules become more intricate, early and informed planning is essential to protect your wealth and ensure financial security for your loved ones.
Further Reading
Lifetime gifts and Inheritance Tax: How to notify HMRC
How to use Inheritance Tax Loss Relief to reclaim IHT after a stock market fall
Beyond the 7-Year Rule: How the 14-Year Rule Impacts Your IHT Planning
