What do we all have in common with David Cameron and his mother?

It has been reported recently that David Cameron and his mother entered into controversial financial arrangements when Mrs Cameron gave £200,000 to her son. Is this likely to have been tax evasion (deliberately misrepresenting or concealing the facts, and therefore illegal) or tax avoidance (perfectly legal and usually driven by the wish to benefit our families)? I suspect the latter and that the gift was part of a legitimate tax planning exercise.

None of us likes paying tax, but we all appreciate the need to fund our hospitals, schools and armed forces and accept we must bear our fair share. However, we are entitled to arrange our tax affairs to provide for our families in the best way we can. Indeed, tax policy has been designed to encourage passing wealth down the generations.

Inheritance Tax (‘IHT’) can be payable during life and on death. However, IHT generally only becomes real to most of us when someone has died. On death, IHT is calculated in most cases on what we own at that time or have given away in the previous seven years. No tax is payable in respect of assets passing to exempt beneficiaries (spouses, civil partners, charities and political parties), and agricultural and business assets may qualify for tax relief.

After those exemptions and reliefs are applied, the first slice of the estate known as the “Nil Rate Band” is free of IHT. This is currently £325,000, with a further relief, the “Residence Nil Rate Band”, up to £100,000, introduced in April 2017. The value of the estate above the IHT Nil Rate Band is taxed at 40%, i.e., for every £1,000 of the estate, £400 is taxed.

In appropriate circumstances, the Nil Rate Band and the Residence Nil Rate Band may be transferred to a spouse’s estate to further reduce the exposure to IHT.

Good IHT planning must be to pass on as much as we can afford to our families during our lifetime, and, as mentioned above, certain exemptions and relief are available, including:

• Gifts between spouses or civil partners, gifts to UK charities and political parties, during life and on death.
• The £3,000 Annual Exemption
• The £250 Small Gifts’ Exemption unlimited annual lifetime gifts so long as the total received by any one beneficiary does not exceed £250.

• Gifts in consideration of marriage or civil partnership are exempt up to £5,000 if given by a parent, £2,500 by a grandparent, and £1,000 by anyone else.
• Normal expenditure out of income – Lifetime gifts forming part of a pattern of normal expenditure and which are made out of income surplus to living expenses..
• Reliefs for Business & Agricultural Property apply during life and on death.
• Potentially Exempt Gifts (“PETs”) – Unlimited outright gifts to individuals which only come into account for IHT if you die within seven years of the gift.

I suspect that, after the death of her husband, Mrs Cameron reviewed her financial position and established that she could make the reported gift to her son without adversely affecting her own financial security. Provided she survives 7 years, the gift will be IHT-free.

Deeds of Variation

Within two years of a deceased’s death, the beneficiary of a Will can vary its terms to divert the inheritance to someone else and so bypass the original beneficiary’s estate for IHT.

The contents of this article are intended as guidance to the general principles of Inheritance Tax and are not a comprehensive statement. No action should be taken without taking further advice specific to your situation.