Gifting Property - IHT Free?

Mark McLaughlin highlights a useful and potentially generous inheritance tax exemption. 

The inheritance tax (IHT) regime includes various useful reliefs and exemptions. Furthermore, certain categories of relief and exemption are not subject to a fixed upper monetary limit, if the relevant conditions are satisfied. Some of them are better known than others.

Perhaps one of the less well known IHT ‘exemptions’ (i.e. whereby a disposition is not treated as a transfer of value for IHT purposes) relates to the maintenance of family members. This applies broadly to the following: 

The exemption is subject to certain conditions in each case (see IHTA 1984, s 11).

For example, the exemption in respect of ‘dependent relatives’ (as defined) applies to the extent that the disposition represents a reasonable provision for care and maintenance of the relative. But what is a ‘reasonable provision’? 

This point was considered in McKelvey (Personal Representative of McKelvey Deceased) v Revenue and Customs Commissioners [2008] SpC 694. In that case, the deceased (D) was a spinster who lived with her widowed mother (M), who was 85 years old, blind and in poor health. D was diagnosed with terminal cancer, and in 2003 gave away two houses she owned to M. D died in 2005, and M died in 2007. 

HM Revenue and Customs (HMRC) sought to charge IHT on the value of D’s gift of the houses to M of £169,000. D’s executor appealed, on the grounds that the gifts were exempt transfers, being a reasonable provision for the care and maintenance of a dependent relative (within s 11(3)). The executor contended that D gave the houses to M so that they could be sold to pay for nursing care. The executor’s appeal was allowed in part. The Special Commissioner held that it was reasonable for D to assume that M would need residential nursing care, and concluded that ‘reasonable provision at the time the transfers were made amounted in all to £140,500’. This amount qualified for exemption under s 11 (NB the balance of £28,500 was a chargeable transfer). 

HMRC’s guidance on what represents ‘reasonable’ provision for the care or maintenance of a dependent relative (at IHTM04177) indicates that regard needs to be given to the financial and other circumstances of the transferor and the relative and the degree of incapacity of infirmity of the latter. HMRC will enquire into the recipient’s ‘financial incapacity’, and will refuse the exemption to the extent that the recipient had sufficient income or capital to make adequate provision for their own maintenance (IHTM04179).

The exemption may be potentially useful if (for example) the transferor’s life expectancy is less than the seven year period necessary for a potentially exempt transfer to become exempt, or the normal two-year ownership period normally required for business property relief.

For example, suppose that Susan (age 38), the single mother of Jacob (age 6) has been diagnosed with a terminal illness. Her assets (which include a property and investment funds inherited from her parents) are worth over £1.4 million. Susan’s estate would be liable to IHT on death, subject to her available nil rate band. Her main concern is to provide for Jacob. Consideration could be given for IHT purposes to the legislation in IHTA 1984, s 11(4) (dealing with the maintenance, education or training of an illegitimate child of the person). The exemption applies to lifetime dispositions, so provision for Jacob would need to be made prior to his mother’s death. Such provision (to the extent that it falls within s 11) would not become chargeable to IHT on Susan’s death. 

Care must be taken, such as in quantifying how much might fall within the IHT exemption and (particularly in the case of minor children) how the funds will be held and applied for the recipient. Expert professional advice is recommended.