Should you consider making gifts during uncertain times?

Following the outbreak of Coronavirus, the world has changed dramatically and the economic downturn has put more focus on planning for long term financial security. However, depressed asset values and low interest rates could now provide a good opportunity for families to plan for intergenerational wealth transfer.

Using depressed values to make gifts

Generally, when a gift is made during someone’s lifetime (whether directly or to certain types of Trust) there will be no Inheritance Tax (IHT) payable providing the donor survives seven years from the date of the gift. Should the donor die within that period, the gift will form part of their Estate and tax could be due. Importantly, tax is applied to the value of the asset at the date the gift was made, not the value at the date of death.

Therefore making a gift now, rather than delaying, would not only start the seven-year clock ticking sooner, but it could potentially ‘bank’ a lower value of the gifted asset (on which IHT would apply in the event of the donor’s untimely death), meaning less IHT to pay overall.

Transferring assets to save Capital Gains Tax

Depending on the type of asset gifted, this could realise a gain for Capital Gains Tax (CGT) purposes at a rate of up to 20% (or 28% in the case of property). A depressed value at the date of the gift or transfer means a lower gain being realised and therefore, less CGT becoming payable. Indeed, some assets may currently be standing at a loss and if these assets are gifted, then no CGT would be due. The losses can then be carried forward and utilised in subsequent years to offset future gains, potentially meaning less CGT to pay later.

Planning for yourself for your lifetime

Before considering making any gifts it is imperative that you plan for your own financial security first. It can be a difficult task to plan what level of funds you will need to last the remainder of your life, with the fear of running out of money often a key impediment to people making effective plans to mitigate future IHT bills.

It is important to plan for all eventualities, such as potential care costs, as this is likely to be the biggest financial burden people may come across in later life. Planning can help you to understand what you may require and how this can be funded.

Once you have a plan in place, you will need to ‘stress test’ your assets. This means looking at different scenarios to understand how your plans may fare during an economic crisis such as we are currently seeing. How might your assets be impacted, how may they recover and how will you survive on a potentially decreasing pot?

By completing this exercise, you gain a much better idea of how much you may be able to afford to gift during your lifetime, giving you peace of mind that your own needs will be taken care of.

Business Relief

As I have already touched on, it is the often the fear of “what if I need it?” which often prevents people from making gifts to reduce the value of their Estate and therefore save potential IHT.

For those who do not wish to give away assets, either because they are unsure if they will need them for themselves, or if they need income from them, there is a potential option which can help.

Investments which qualify for business relief benefit from 100% IHT relief after a period of just 2 years (providing that qualifying assets are held on death).

As you are not giving anything away, merely investing your own money in a different manner, there is no loss of control, continuing access and you could receive an income from the investment. Also, as you are not giving anything away, it is an option open to an Attorney to mitigate IHT on an Estate they are looking after on somebody else’s behalf.

There are many such investments available, but they do have risks associated with them and you may not get back the full amount invested, so appropriate professional advice is crucial.

Get in touch

I hope that this has given you food for thought with regard to the transfer of wealth. The key aspects are to have a clear understanding of what you may need for yourself, then to consider how best to use your assets to mitigate future IHT.

If you need any guidance on planning for your future, advice on making gifts (including establishing Trusts) or wish to find out more about business relief, please get in touch and we can talk about you.

Lee Smythe MSc