Roll up, roll up: come and get your IHT planning advice... from a government minister
Something strange is going on....
You couldn’t make it up: Ministers are giving advice on reducing their own tax.
What strange parallel universe do we live in? Consider this:
There’s a “black hole” in the economy.
The government introduces an IHT increase on farmers and other business owners to help plug that hole by raising revenue.
Remember those last two words—raising revenue.
Government minsters then actively promote perfectly legal tax mitigation techniques that, if adopted by the very people impacted by the proposed changes, would result in—you guessed it—no revenue being raised.
It’s the logic of lunacy.
Former Environment Secretary Steve Reed has been “bigging up” the role of the accountants and lawyers, advising that: “the best thing to do is for people to take professional tax advice and manage their tax affairs appropriately”. (Source Sky News )
He’s even helping them on their way, recommending one of the top techniques for falling outside IHT. Back in November 2024, farmer David Barton challenged the minister and found himself on the receiving end of one of Steve Reed’s tax planning strategies—namely giving assets away and surviving seven years.
There is a lesson for taxpayers in all this.
If ministers are giving us advice on how legally to minimise the IHT due under the new regime, we should certainly be paying attention.
In this post we will begin our journey through the government’s favourite tax tip: giving assets away and living for seven years. There is much to cover, and as a result we can’t do it all today—it will most likely take another couple of posts to explain this area properly, but let’s see how we go.
It strikes me that for this to have widespread coverage, it really does need some catchy re-branding to draw more attention to it—so from now on I am going to call it Give and Live.
In essence it is simple and powerful—and if your circumstances mean that you can do it, you should.
Give and Live
Let’s start with the basics.
Every schoolboy knows that if you want to avoid IHT on an asset, then, instead of holding on to it until death, where it forms part of your estate, you give it away. As long as you survive seven years from the date of the gift, the IHT disappears. That’s the essence of it, but—as with everything in the field of UK tax law—there are complexities to navigate.
Here’s my short explanation of why it works:
IHT is a tax that applies to an estate at death.
It also applies to assets you owned but gave away in a period leading up to your death.
The government have decided that period should be seven years.
This means that if you give something away and survive seven years, then you have sidestepped the rules, and there is no IHT to pay.
Incidentally, if you do die within seven years of a gift, IHT falls due, but there is a helpful relief called taper relief which can reduce the % rate of tax payable. That’s a nice additional benefit to have. More on that in the next post as there is an unexpected twist with taper relief that you need to be aware of. It is also important to understand who pays the tax on gifts in the event of an early death—we will cover that in a future post as well.
Now, let’s get back to the Give and Live planning. The way the legislation works is by introducing the concept of a ‘Potentially Exempt Transfer’ - or PET for short. At the time you make a gift, it is potentially exempt, and if you live for seven years, it becomes wholly exempt from IHT. If that happens, the planning has been successful.
Auf Wiedersehen PET.
You don’t own me…..
The first thing to get your head round is that for this to work, you actually have to give an asset away. Giving stuff away to someone is often difficult. If you are the owner of a nice juicy piece of land, you may struggle with the idea of not owning it any more. You have to give up the income from an asset when you give it away. You also need to be comfortable with who you are gifting the asset to. All this means that Give and Live needs to fit in with your financial and family circumstances.
What to give?
How do you work out what to give in the first place? You don’t want to give everything away as you need to make sure that you have adequate future income for your needs. You should start to develop a plan. One approach to this exercise is as follows:
Make a list of everything you own, and for each item, come up with a value and, where it produces an income, quantify that annual income.
Don’t forget to bring in state pension and private pensions if you have them. As a result of changes proposed in the 2024 budget, Rachel Reeves will be bringing personal pensions within the IHT net from April 2027, so the general tactic for personal pensions will start to change—you should see them as a source of income for you, rather than something to leave to your kids.
Once you have quantified everything, decide which assets you need to retain to provide a sufficient income for your future. Keep those things.
What is left is up for grabs to be given away under the Give and Live strategy—but only once you have been through all the tax issues and identified any problem areas. As I will show you, these tend to be where there are as-yet-unrealised capital gains on certain classes of assets.
If you can do it, ending up with an estate (after all your gifting) made up of agricultural/business property with a total value under £2m, including the farmhouse you live in, will give you the best chance of maximising reliefs and nil-rate bands. The first £1m of agricultural/business property will qualify for 100% relief, any other agricultural/business property will attract 50% relief, the nil-rate band is £325,000, and the residence nil-rate band is worth £175,000. The reason for suggesting a sub-£2m target is that the residence nil-rate band is restricted where the estate is worth more than £2m.
Gifts with reservation of benefit - or gifts with a sting in the tail
This is the first area of IHT legislation that can really trip you up when you try to Give and Live.
Once gifted, the asset is no longer yours, and if you want the planning to work, you must not get any benefit from it. The reason is that if you do get a benefit, then it doesn’t actually count as a gift in the first place and the IHT planning will fail. The seven-year clock hasn’t started to tick, and won’t ever start while the benefit to you remains.
The classic example in every text-book on this subject is a parent giving away the house he/she lives in to a child. If the parent continues to live in the house rent free, then it isn’t a pure gift. In the terminology of the legislation, the parent has reserved a benefit. The gift is known as a gift with reservation of benefit (or GROB). GROBs are no good. They are nasty little sods that completely frustrate the IHT planning in the first place, and should be avoided.
If the parent paid a market rent for living in the house, there would be no GROB, but that is often impractical, and creates a yearly tax cost within the family. That imbalance arises because the annual rental income for the child is taxable as income (at a maximum rate of 45%), but the rental expense for the parent is not deductible anywhere. If that goes on for ten or fifteen years, the numbers really add up. As a result it is probably more realistic to expect that in most cases where the parent needs to stay living in the house, the house will not be gifted, and will therefore stay in the estate at death, owned by the parent. If the estate is under £2m, then at least there is a chance of benefitting from the residence nil-rate band, which in effect exempts £175,000 of the estate from IHT.
It is equally the case that if you give away an income producing asset, you must not take an income from it in the future. Let’s look at a specific example of a GROB relevant to farming partnerships. It concerns profit share percentages. If you are a partner in a farming partnership, your annual percentage profit share is usually going to reflect two things:
The value of assets you have contributed to the partnership—eg land and buildings
The value of your experience and labour
If you give away partnership assets as part of a general gifting strategy, then as sure as night follows day, your annual % profit share must come down—otherwise you will be retaining a benefit and will be caught by the GROB rules. Think about it with an extreme example and this will make sense—if after gifting everything you own, you remain a partner, continue to work in the partnership and have zero partnership assets, then your annual profit share must simply reflect the value of your labour/experience, and not any return on assets. If it continues to reflect a payment for assets, then you must have retained a benefit and there will be a GROB, rendering the planning ineffective.
So please make sure that in these circumstances you take proper professional advice on the size of the reduction in your profit share going forward, and document the rationale.
Your fellow partners (typically your family members) in receipt of gifts of your partnership assets will be on the other side of the coin, and will see their annual profit share rise accordingly.
Let’s leave it there for today.
Next time we’ll look at when to gift, how to identify what you are gifting (we will see that many farmers acting in partnership don’t actually own what they think they own) and how to document it. Then we will cover taper relief, who pays the tax in the event of an early death, and what falls within the interest free installment regime, a valuable relief which you really do want to benefit from if there is tax to pay.
Enjoy the rest of your Sunday.