Daniel Craig has recently said he does not believe in leaving his estate to his children on his death, saying in an interview with Candis magazine, “I don’t want to leave great sums to the next generation. I think inheritance is quite distasteful. My philosophy is to get rid of it or give it away before you go”. Daniel’s philosophy reportedly follows that of Andrew Carnegie, who Daniel said he believed gave away in today’s money around $11billion in his lifetime.
Planning for the next generation is a key part of estate planning – it is a balancing act between giving enough away (and giving through the right method or structure) but retaining enough assets for you to maintain your lifestyle, including the possibility of a change in future needs with an associated cost increase, such as care fees. You only live once (contrary to the film title, You Only Live Twice) so taking care of your needs should always be paramount.
Under current Inheritance Tax (IHT) rules, an individual can give away as much as they choose during their lifetime – there are no lifetime caps on gifting as there are in some countries. Outright gifts are called potentially exempt transfers (PETs) and a PET does not give rise to an immediate IHT charge when the gift is made. If the person making the gift (known as the donor) survives the PET by 7 years, the PET becomes exempt and therefore is not subject to IHT in the donor’s estate. However, if the donor dies within 7 years of making the PET, the PET becomes chargeable and is brought back into account when calculating the IHT due on the donor’s death. There may be a benefit to an estate if a donor makes a PET and survive at least 3 years, as the IHT due on the failed PET might taper by 20%,40%, 60% or 80%, according to whether the death occurs in the fourth, fifth, sixth or seventh year respectively. Note, it is the tax that tapers, not the value of the gift, which means that taper relief will not apply if the cumulative value of the gifts made in the 7 years prior to the donor’s death are worth less than the donor’s Nil Rate Band, which is currently worth £325,000. Outright gifts to children or other family members can be a useful form of IHT planning, so long as you are comfortable with losing control over that money once it is given, and have no concerns about the recipient’s ability to handle the money received.
The other option with lifetime giving is to give assets to a trust, which provides a layer of control and asset protection. Trusts are structured with a class of beneficiaries, which can include not only specified individuals but also a wider class of beneficiaries, such as other family members that you might want to benefit. The money transferred to the trust is managed by trustees, of which you could be one, should you wish to retain control over the money. Transfers into a trust are known as chargeable lifetime transfers (CLTs) and, if the value of a CLT is under the Nil Rate Band and the person making the gift (known as the settlor) has not made any previous CLTs in the 7 years before the trust is created, the CLT would not incur an immediate IHT charge. If the CLT is worth more than the Nil Rate Band, or if the total of the current CLT and any previous CLTs in the last 7 years is worth more than the Nil Rate Band, the CLT would generate an immediate IHT charge based on the amount by which the Nil Rate Band has been exceeded taxed at 20%. Transfers to trusts are used where control is key, such as for vulnerable or spendthrift beneficiaries, or where the settlor wants to have a say in the future use of the money and becomes a trustee.
Gifting forms a key part of estate planning but should not be undertaken without a detailed analysis of your own circumstances as well as the recipient’s circumstances. Whilst Tomorrow Never Dies, sadly, we all will, and it is key that your estate planning matters are reviewed thoroughly during your lifetime. Advice can be given from our tax planning team on lifetime giving as well as appropriate structures to consider. For more information, please contact firstname.lastname@example.org