Earlier this year, the independent Office for Budget Responsibility (OBR) forecast that receipts of IHT would rise each year until at least 2027. The increase in IHT receipts already seen since 2010 mainly reflects the rise in property prices – the OBR stated (unsurprisingly) that residential property makes up the largest share of most estates.
Given that the average house price rose by more than 40 per cent since 2010, combined with the freeze on the IHT threshold (which has remained static at £325,000 since 2009 and will remain frozen until 2025-26) – it’s not hard to see that more and more estates will incur an IHT liability as time goes on.
Reducing IHT debt
The diligent lawyer advising on wills, tax and estate planning will advise clients on the benefits and risks of making lifetime gifts to reduce their potential IHT liability. However, the perennial problems around the existing rules governing taxation of inter vivos giving have been highlighted over the last couple of years, leading to the publication of the second report from the Office of Tax Simplification (OTS) with its recommendations for changes around IHT.
The Law Society, for instance, highlighted some of the difficulties around the technical rules and the complexities of how the various lifetime gift exemptions and taper relief work in practice. Separately, an All Party Parliamentary Group said it supports IHT reforms, including amendments to lifetime giving.
But despite the OTS proposals, no formal rule changes have yet been put forward by government and the rules remain unchanged for the foreseeable future.
Practitioners would therefore do well to refamiliarise themselves with Law Society guidance on lifetime giving, which has recently been updated. The guidance reminds lawyers of good practice when advising clients who want to transfer assets to family and friends, particularly when motivated by mitigating tax liabilities or future care costs.
It warns particularly of the risk to solicitors of being implicated if found to have aided a client's deliberate deprivation of assets, or found negligent for providing inaccurate tax advice.
The updated PN covers additional elements including in relation to the donor’s objectives. Where the donor’s aim, for instance, is to advance someone’s inheritance with the intention that it is brought back into account through a revised will, the practitioner should advise the donor of the importance of making that revised will. A detailed explanation of the rationale should also be made and retained with the will.
You may also need to be aware of further issues behind the donor's decision. Where the client explains these to you, the guidance urges you to carefully document all such explanations and motivations.
There are also specific issues and risks in connection with gifting or transferring the donor’s home, particularly if they intend to continue living in the property. The PN cites, in particular, the implications for the donor of any future divorce or bankruptcy proceedings; the loss of the opportunity to downsize or release equity for their own care; and the risk of the donee selling up and under no obligation to discuss this with the donor themselves.
The guidance includes an expanded section on local authority care provision and the potential impact of gifting assets to avoid future care costs.
Remember that when taking on a new client, always check whether they have already sought advice from another lawyer and, if so, why the change. There could be issues relating to undue influence, a potential conflict of interest or potential money laundering.