How to cease the taxman snapping up your kids’s inheritance

Anne Robinson may have amassed a hefty £50 million fortune thanks to decades working as a successful TV presenter and some shrewd property purchases. But, according to comments she made this week, The Weakest Link host may not have a penny to her name.

‘I’ve given it all away,’ she said in an interview with Saga magazine.

‘I don’t want the tax man to have it. I’ve spread it about quite a lot, to the children. They may as well enjoy it now.’

While few families have wealth on the level of Anne, many share her point of view.

After years of saving and earning, they wish to pass it on to their loved ones without their estate incurring a substantial inheritance tax bill.

Family members also often want to make gifts that can be enjoyed immediately – especially when children and grandchildren would benefit from help for a house deposit, living costs or school fees.

But is it really possible to hand over all of your money in your lifetime – or is there still a risk there would be a bill to be paid on your death? And how may Anne Robinson have done it? Wealth asks the experts.

Start early and beware the seven-year rule

You can give away your own money to whomever you choose, whenever you like. And if you live for at least seven years after making the gift, it falls out of your estate for inheritance tax purposes, so there will be no bill to pay. 

Anne Robinson is 79 years old. That means any gifts that she gave to her family when she was 72 or younger are already free of inheritance tax, and any made since will be gradually falling out of her estate over the years.

The seven-year rule means that it makes sense to start making gifts on the earlier side if you can afford to – preferably when you are still fit and healthy. 

Don’t worry unless you have a sizeable estate 

Anne had reportedly accrued a fortune of around £50 million. Without any inheritance tax planning, her family therefore may have incurred a bill of around £19 million on her estate. So you can see why she was motivated to find a way to reduce it.

However, only four per cent of estates currently incur an inheritance tax bill.

That is because everyone can give away up to £325,000 tax free – and married couples or those in civil partnerships can share their allowances to give away a combined £650,000. A couple can pass on a family home worth up to £1 million without incurring a tax bill.

So if your estate value – including property, investments and all other assets – is under these allowances, there is no inheritance tax to pay. Everything above will be taxed at 40 per cent.

Get some good advice from an expert 

Giving away sizeable gifts without risking an inheritance tax bill is often complicated – especially if you have a large estate.

It is very likely Anne would have done it with the help of a solicitor or financial planner. We’ve spoken to a number of experts to find out the types of options that are available, but in many cases you will need advice on how the rules apply directly to your own personal circumstances.

Watch out when giving property away 

Anne reportedly owns a number of properties, including a Grade II-listed converted barn in the Cotswolds and homes in New York and the Hamptons. Ian Dyall, head of estate planning at Evelyn Partners, says that, in theory, she could give the properties to her family now and still continue to use them.

‘However, if she did, she would have to pay the new owners for the privilege,’ he says. ‘If you make a gift with strings attached – such as giving someone a property but still having use of it – that is what is known as a ‘reservation of benefit’. In that case, the property may still be considered as part of your estate for inheritance tax purposes. In order to prove that the gift was made without strings, Anne would have to pay market value rent when using the properties. The new owners of the properties may also face an income tax bill on the rent.

For many families, this simply wouldn’t make financial sense. There is also risk involved as once you have handed over a property, you would have no say over it. There would be nothing to stop the person you gave it to from selling up or turning you out if you were renting it from them.

However, in Anne’s case, where she has properties that she is unlikely to use very often, Ian says handing them over now could make good financial sense.

‘If she has several properties, there will be some that she is unlikely to use more than a few weeks every year,’ he says.

‘In that case, to pay market rent and save 40 per cent of its full value in inheritance tax later on is probably a good strategy.’

Have trust – or create trust for loved ones 

Once you’ve handed over wealth to loved ones, you lose control of it. For many, this will not cause any problems. Anne says of her children, ‘They may as well enjoy it now’, which suggests that she was happy for them to receive a fortune already.

However, sometimes it is not that simple. People worry that family members may not be in a position to deal with a large lump sum.

Or they fear that a family member is in an unstable relationship and would end up losing a portion of what would have been their inheritance to a spouse should they get divorced. In these circumstances, trusts can be useful.

These are a legal arrangement where you can hold assets such as cash or investments that are put aside for someone else, such as your children or grandchildren.

Assets held in trust are considered as not belonging to you, so, if they are set up correctly, they shouldn’t count as part of your estate when calculating if any inheritance tax is due.

The trust is looked after by trustees, who are legally responsible for managing the assets for the person or people who will ultimately benefit from them.

When you set up a trust, you decide the rules. For example, you may decide that beneficiaries can only access the assets once they reach the age of 18 or 25.

Trusts vary in complexity, but even the simplest require professional help from a financial planner or lawyer to set up.

There are a number of different types of trust and tax rules vary depending on which you choose.

Ian Dyall shares the example of a client who used a trust to give money to their son. ‘They have two children,’ he says.

‘Their daughter is in a stable relationship and is good with money and they were happy to give her a lump sum.

‘But the son is a bit more wayward and they were nervous about giving money to him.

‘However, they wanted to split things equally between the two children.’

Ian explains the couple set up a trust for the son and put the same sum in it as they had given to their daughter.

But they and other trustees controlled the trust money so the son could only access it for reasons they were happy with.

Don’t run out of cash – you still need to live

Faye Church, a senior chartered financial planner at investment manager Investec Wealth & Investment, says that her clients often say they would like to gift more, but don’t know how much they can afford to give away.

‘We can, by using assumptions, quantify this using cash flow planning to show the amounts they wish to gift shouldn’t leave them destitute in their later years,’ she says.

Dyall adds that you can create a model to show how the absolute maximum amount of money that you are likely to need to live on during your own lifetime, to pay for care fees and whatever else the future brings.

‘Then you know anything you have on top of that you can safely give away,’ he says.

Get your estate below £2m and save £140,000 

A couple who are married or in a civil partnership can pass down the family home worth up to £1 million to direct descendants inheritance tax free, so long as their estate is worth under £2 million.

If your estate exceeds £2 million then tapering will apply to the allowance that allows you to pass on a family home – known as the residential nil rate band – by £1 for every £2 you are over this limit until it is completely phased out.

It may therefore be appropriate to give away some assets during your lifetime to bring your estate below the £2 million threshold.

Michelle Holgate, financial planner at wealth manager RBC Brewin Dolphin, explains: ‘If a widower died with an estate of £2.6 million then they are £600,000 over the limit, and tapering will apply to the residential nil rate band. If they gave away the £600,000 to a loved one before they died, then the residential nil rate band would be restored in full, saving them £140,000 in tax.’

Give to charity and leave a legacy 

Anne did not reveal whether she made charitable donations as well as giving to family members.

But gifts to registered charities do not attract inheritance tax. And in addition, if you give at least ten per cent of your estate to charity, it reduces your overall inheritance bill rate from 40 to 36 per cent.

Plus any money collected through inheritance tax goes towards Government spending, where around two thirds is spent on public services such as the NHS and schools and another quarter goes on social security such as universal credit and the state pension.

Although families are often loath to pay inheritance tax, it can be a valuable legacy – and only payable after you have handed a substantial sum to loved ones tax free.

Give out income to pass on what you like

As generous as Anne has been, she is still likely to be receiving an income, for example from pensions. However, there is a clever trick that allows you to give away part of your income without risking an inheritance tax bill.

You can pass on as much money as you like tax-free – as long as it comes from your income rather than existing assets.

Gifts made this way are immediately tax-free and are not affected by the seven-year rule. In order to qualify, the gifts must follow a regular pattern and should not affect your standard of living.

There is no limit to how much you can give, but it is important that you keep good records. Regular payments into loved one’s savings, pension or for school fees are three popular uses.

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