Will one of my children pay more inheritance tax than the others?
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Over the years, I have made generous financial donations to my three daughters. The older one benefited from it many years ago, the younger two more recently. If I die (I’m 82), would inheritance tax on donations fall on my younger daughters or my entire estate? I fear it will cause friction if the responsibility is not shared between my three daughters.
Lilly Whale, Lawyer in the Private Client Team of Goodman Derrick, a London law firm, says individuals are increasingly choosing to freeze the size and scope of their estates by making large, lifelong gifts. However, many are understandably concerned about the tax consequences of such a decision.
A carefully planned lifetime gift can be a useful tool to reduce inheritance tax (IHT) in the event of death, but the donor may not want their involuntary recipient to take responsibility for settling any tax liability if they die. too soon after making the donation.
You did not specify exactly how much you gave, or when the gifts were given. For the purposes of the HMRC, these are potentially exempt transfers (PET); provided you survive the seven year donations, they become fully exempt. Otherwise, the freebies become chargeable and will deplete all or part of your zero rate bracket (currently Â£ 325,000). This is because a failed PET could mean that your estate owes more IHT.
The default legal position is that the IHT on a stranded PET is payable by the recipient of the gift. For example, if you gave Â£ 300,000 on the first day to your second daughter, then Â£ 300,000 on the second day to your third daughter and you die a month later, the zero rate range – assuming the gift of your first daughter falls outside the seven-year period – will use the value of these gifts. This means that Â£ 275,000 from the second donation becomes taxable.
As the IHT is currently charged at 40%, it would be up to your third daughter to settle the Â£ 110,000 liability with HMRC within six months of your death.
This can be an unappealing prospect for everyone involved. If you want to ensure parity when it comes to gifts to your three daughters, you may want to include a clause in your will that any IHT payable on a failed PET is payable by your estate rather than the recipient of the gift – which means that none of your daughters are personally responsible for the IHT as recipients.
Assuming they inherit your estate in equal parts, your three daughters will therefore receive an equal but lesser part of your estate, net of any IHT settled from the residue.
Since the zero tranche is used on paid transfers in chronological order, the oldest failed TEP will benefit from it first. There are other options you may want to explore, such as including a zero rate discretionary trust in your will to ensure that the zero rate range is not exhausted by a single donation; or purchase an insurance policy to cover IHT if the estate does not have sufficient funds upon your death. Your lawyer or financial advisor can advise you further on your options.
During the pandemic, my private accountant advised me to transfer money from a bank to an investment opportunity and I lost money as a result. Is there anything I can do?
Sinead O’Callaghan, partner at Cooke, Young & Keidan law firm, said, given the volatility of a whole range of investments during the pandemic, it seems inevitable that accountants and investment advisers will face a growing number of complaints and claims regarding the advice they have given in connection with the pandemic. investments whose value has fallen.
Those affected may have complaints ranging from misunderstanding of investment criteria and risk appetite, to inadequacy or lack of advice on the risks and implications of the investments in question.
The good news is that you may be able to recover your losses if your accountant or investment advisor gave negligent advice – failing to advise you to reasonable professional standards – or if they did not follow the rules. relevant regulations in its dealings with you.
Your first stopover should be to review the contractual agreement you have in place to see if there is a prescribed complaints procedure to follow. If so, consider whether you would like legal advice as part of preparing your complaint or claim, or getting accounting advice to help you quantify your losses. This is probably more important for more complex investments and where larger losses have been incurred.
If there is no complaints procedure in your contract, you must still formally notify your complaint or complaint to your accountant or investment advisor. This can be done personally or through a letter sent through lawyers. Separately, it may be helpful to research which investments failed and whether they caught the attention of the press. Action groups may have already formed and you may be able to join. These can be a useful source of information.
If the demand letter and subsequent negotiations fail to result in a satisfactory settlement or resolution, your next option will be to consider recourse to the courts or through arbitration proceedings if these. are provided for in your contractual agreement. At this point, it would be a good idea to seek legal advice, if you have not already done so, regarding the merits of your request and the implications of initiating proceedings.
If the merits are not good enough to warrant legal or arbitration proceedings, then other potential options open to those affected include filing a complaint with the UK Financial conduct authority, the Association of Chartered Accountants or the Institute of Chartered Accountants in England and Wales. Again, you should seek legal advice to establish which of these avenues, if any, are open to you, based on the specific circumstances.
The opinions contained 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 results of reliance on responses, including any loss, and disclaim all liability to the greatest extent possible.
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Our next question
I separated from my ex-wife in December of last year and we are in the process of dividing our property. We have agreed that I will transfer my half of the family home to her so that she can sell the property to pay her legal fees and buy a more convenient place to live. In the meantime, she will give me her share in the family business that my father started. This arrangement makes sense in terms of personal circumstances, but does it make sense in terms of our tax obligations?