Accelerating inheritances

The first half of 2020 has brought unexpected financial pressures for many, with concerns about job insecurity, reductions in working hours and remuneration, and threatened business failures. This has prompted the older generation to consider accelerating inheritances, as a way both of providing immediate assistance and mitigating inheritance tax.

But what is the best way of offering help to the younger generation? What form should a gift take? Ideally the starting point would be a financial appraisal, on both sides. How much can the parent or grandparent afford to give away? Do they have liquid assets if cash is required, or are there assets attracting inheritance tax reliefs that can be given away with favourable tax treatment? What is the financial position of the intended recipient – are there short term cash flow problems or is there likely to be greater need with a redundancy looming which will make it impossible to pay future school fees?

It may be that the parent or grandparent can tailor the gift to the need by using surplus income to pay bills or to pay off debts on behalf of the child or grandchild. Where such gifts fall within the ‘normal expenditure out of income exemption’ no inheritance tax is payable. Very precise requirements must be met to qualify for this exemption and good advice is essential. The annual inheritance tax allowance of £3,000 (which can be carried forward for one year only) may also be useful.

If a more substantial gift is contemplated, perhaps an injection of cash for a business that has been hit hard by the pandemic, a chunk of investments may need to be sold. This may have tax implications for both the donor and the recipient. Even with falling stock markets, the disposal of investments is likely to give rise to a capital gain and the donor will need to factor in a tax charge at a rate of 20% when working out how much can be given away. From an inheritance tax point of view, the hope is that the donor will survive for seven years, after which the value of the gift will fall out of account completely, and tapering relief applies after the first three years. However, it is not always appreciated that if inheritance tax becomes payable, the liability falls on the recipient of the gift.

Anyone thinking of aiding a business by waiving income or dividends would do well to be aware of the tax traps noted in this article by Carolyn O’Sullivan and Paul Gallagher.

Where the parent or grandparent would prefer to make a gift providing longer term benefit for younger members of the family, for example to pay the costs of secondary / tertiary education, the creation of a trust could offer tax and other advantages.

Two grandparents could together gift cash or stocks and shares up to the value of £650,000 to set up a trust fund without triggering any immediate inheritance tax or capital gains tax charges. If there are assets benefiting from inheritance tax relief, like AIM listed shares, it may be possible to make gifts in excess of this figure. The lower investment values of a depressed stock market mean more stocks and shares can be gifted, with the grandchildren enjoying the benefit of investment growth in future years.

Aside from tax, a trust offers significant flexibility especially if there are several branches of a family to be considered and the financial impact of the pandemic for individual family members is uncertain. The trust deed would usually give the trustees wide discretion over the distribution of the trust fund with guidance provided by way of a letter of wishes.

For those in a position to make a financial difference by way of a gift there is an array of options available under current tax rules. However, rumours of an emergency budget ‘pencilled in’ for July 2020 would suggest there is unlikely to be a better time to accelerate inheritances, and clients would therefore be well advised to make the necessary decisions, and implement the planning, sooner rather than later.