If you are thinking of making substantial gifts this Christmas as part of wider succession planning then this is a must read.
Whilst we are generally free to give our property and assets to whomever we wish, there are a number of things to consider.
I appreciate tax may not be the first thing to come to mind when making a gift, but it is very important. For example, a gift of property or land can trigger Stamp Duty Land Tax or Capital Gains Tax liabilities. Failure to disclose such disposals to HMRC can result in penalties and/or interest on any tax due.
If you die within 7 years of making a gift then generally this will be outside of your estate for Inheritance Tax purposes.
A gift of farmland or an interest in a business may attract relief from Inheritance Tax due to Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). However, if the person making the gift (the ‘Donor’) dies within 7 years and the recipient of the gift (the ‘Donee’) transfers or sells the asset (or the conditions for APR or BPR no longer apply) during this period, then the value of the gift may be brought back into account for Inheritance Tax purposes without any relief being available to offset against it.
Similarly, if the Donor retains any benefit, such as continuing to live in a property, then the 7 year clock never starts and the value of the gift will not be outside of their estate on death, irrespective of how long has passed since the gift was made.
It is also very important to be aware that once you make a gift of an asset you no longer own it, and consequently you have no control over it and cannot reclaim it if you need it in the future.
This can be very important if the Donee were to die, become bankrupt or get divorced after the gift is made.
On the death of the Donee, the asset gifted to them will pass under the terms of their Will or Intestacy, possibly to someone the Donor dislikes. Similarly, with bankruptcy, the asset gifted to the Donee would be taken into consideration by the Trustee in Bankruptcy and could be used to settle any debts.
On the divorce of the Donee, the asset gifted could form part of the marital assets and this could result in half of the asset gifted passing to a former son or daughter in law (subject to any pre or post-nuptial agreements).
With Christmas just around the corner, it can seem like a lovely idea to take that final step in succession planning by making a substantial gift. However, there are lots of things to consider, and obtaining appropriate advice before making the gift is crucial to avoid any unforeseen, and potentially costly, consequences.
At Hay & Kilner, our Rural Team can provide advice on all aspects of succession planning and the transfer of land, buildings and property. For more information please contact Alison Hall, or call 0191 232 8345.