Over the years, I have made generous financial gifts to my three daughters. The eldest benefited many years ago, the younger two more recently. If I pass away (I’m 82), would the inheritance tax liability on the gifts fall on my younger daughters or on my estate in its entirety? I am concerned that this could cause friction if the liability isn’t shared between my three daughters.
Lilly Whale, solicitor in the private client team at Goodman Derrick, a London law firm, says individuals are increasingly choosing to freeze their estate’s size and extent by making significant lifetime gifts. However, many are understandably concerned about the tax consequences of doing so.
Carefully planned lifetime gifting can be a useful tool to reduce inheritance tax (IHT) on death but the donor may not wish their unwitting beneficiary to shoulder the responsibility of settling any tax liability if they die too soon after making the gift.
You have not specified exactly how much you gifted, nor when the gifts were made. For HMRC’s purposes they are potentially exempt transfers (PETs); provided you survive the gifts by seven years, they become fully exempt. Otherwise, the gifts become chargeable and will use up all or part of your nil rate band (currently £325,000). Effectively, a failed PET could mean your estate is liable for more IHT.
The default legal position is that IHT on a failed PET is payable by the recipient of the gift. For example, if you gave £300,000 on day one to your second daughter and then £300,000 on day two to your third daughter, and died one month later, the nil rate band — assuming your first daughter’s gift falls outside the seven-year period — will use up the value of those gifts. This means £275,000 of the second gift becomes chargeable to tax.
As IHT is currently levied at 40 per cent, it would fall to your third daughter to settle the £110,000 liability with HMRC within six months of your death.
This may be an unappealing prospect to everyone involved. If you want to guarantee parity in respect of the gifts to your three daughters then you might want to include a clause in your will stating that any IHT payable on a failed PET is payable from your residuary estate rather than by the recipient of the gift — meaning none of your daughters are personally liable for the IHT as recipients.
Assuming they stand to inherit your estate in equal shares, your three daughters would thus receive an equal but smaller share of your estate, net of any IHT settled from residue.
As the nil rate band is used on chargeable transfers in chronological order, the earliest failed PET will benefit from it first. There are other options you may wish to explore, such as including a nil rate band discretionary trust in your will to ensure that the nil rate band is not exhausted by one gift; or taking out an insurance policy to cover IHT if the estate does not have enough funds on your death. Your solicitor or financial adviser can advise further on your options.
During the pandemic my private accountant advised me to move money from one bank into an investment opportunity and I have lost money as a result. Is there anything I can do?
Sinead O’Callaghan, partner at law firm Cooke, Young & Keidan, says given the volatility of a whole spectrum of investments during the pandemic, it seems inevitable that accountants and investment advisers will face an increasing number of complaints and claims about advice they have given in connection with investments that have plummeted in value.
Those affected may have complaints ranging from failure to understand the investment criteria and appetite for risk, to unsuitability or a failure to advise on the risks and implications of the investments in question.
The good news is you may be able to recover your losses if your accountant or investment adviser has given negligent advice — failing to advise you to a reasonable professional standard — or they have not followed the relevant regulatory rules in their dealings with you.
Your first port of call should be to look at the contractual agreement you have in place to check whether there is a prescribed complaints handling procedure for you to follow. If there is, then consider whether you wish to obtain legal advice in connection with preparing your complaint or claim, or obtain accounting advice to assist with quantifying your losses. This is likely to be more important for more complex investments and where larger losses have been suffered.
If there is no complaints procedure in your agreement then you should still give formal notice of your complaint or claim to your accountant or investment adviser. This can be done personally or via a letter sent through solicitors. Separately, it may be worth carrying out some research on the investments that have failed and whether they have attracted any press attention. It may be that action groups have already formed which you can join. These can be a useful source of information.
If formal notice and any subsequent negotiations fail to produce a satisfactory settlement or resolution, then your next option will be to consider seeking recourse through the courts or through arbitration proceedings if these are provided for in your contractual agreement. At this stage it would be sensible to seek legal advice, if you have not done so already, in relation to the merits of your claim and the implications of commencing proceedings.
If the merits are not sufficiently good to justify court or arbitration proceedings, then some other potential options open to those affected include lodging a complaint with the UK’s Financial Conduct Authority, the Association of Certified Chartered Accountants, or the Institute of Chartered Accountants in England and Wales. Again, you should take legal advice in order to establish which of these avenues, if any, are open to you, depending on the specific circumstances.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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Our next question
I separated from my ex-wife in December last year and we’re in the process of dividing our assets. We have agreed that I will transfer my half share in the family home to her so that she can sell the property to pay her legal fees and purchase somewhere more convenient to live. Meanwhile, she will transfer back to me her shares in the family business that my father started. This arrangement makes sense in terms of our personal circumstances, but does it make sense in terms of our tax liabilities?