Passing it on: planning in anticipation of a gift tax

The transfer of assets between generations has come under increasing pressure from successive governments.   The 'nil rate band' amount that can be left free of tax has been frozen at £325,000 since 2009.  An increase in line with inflation would have resulted in an exemption of £520,000.  The annual exemption for gifts has remained at £3,000 since 1984 (an inflationary increase would be close to £10,000 now). 

Business owners and farmers are currently able to rely on 100% relief from inheritance tax in many situations, ensuring that businesses and farms do not need to be broken up and sold on the death of the owner, but this will be restricted to 50% from April 2026.

Pensions have historically offered a haven from tax on death, but from April 2027 will also be brought within the charge to inheritance tax and a 40% charge.

For many the response to these changes is to look to transfer assets between generations earlier rather than later, to fragment ownership.

The difficulty with such an approach is that the tax planning will often mitigate in favour of making gifts at a time when the recipient is not able to rise to the responsibility of holding significant assets or creating uncertainty for a business which previously had absolute clarity as to ownership and direction. 

Trusts have historically performed a helpful role in such situations, bridging the gap between the time when it is right to make a gift for tax purposes to the time it is right for the recipient to take control and by imposing a separate control mechanism over family assets.  However, since 2006, there have been less opportunities to set up trusts and the proposed changes to business and agricultural relief will restrict this further.

This week's speculation that the Chancellor will look to place a cap on lifetime giving puts increased urgency into lifetime gift planning and will put greater stress on the governance of assets gifted, with many looking to make gifts before October's Budget.

Arrangements such as family limited partnerships and family investment companies, as well as family constitutions, bare trusts and shareholders' agreements all offer useful opportunities to impose governance structures to ensure that families can move forward together and avoid disruption.  Pre and post-nuptial agreements will also be vital to ensure that assets gifted are preserved on divorce.

For some the introduction of a gift tax will be the final straw that causes them to break their ties with the UK and relocate to a more amenable regime.  Italy is a perennial favourite jurisdiction, with an attractive inpatriate tax regime and little or no taxes on death.  Many other countries, such as Spain, Switzerland and increasingly Dubai and Abu-Dhabi offer attractive lifestyles, free from taxation.