What has the Cameron family shown us about inheritance tax planning?
The world of Westminster has been talking tax for the last couple of weeks and the financial affairs of the rich and famous are now in the media spotlight. Offshore investments and inheritance tax (IHT) planning have been front page news.
The story began with the leaking of 11.5 million files belonging to the world's fourth largest offshore law firm. Among the countless names of individuals who had held offshore investments was Prime Minister David Cameron, through his father, the late Ian Cameron. In the days that followed the leak, information about his finances was revealed and the media frenzy seems unlikely to die down.
Scrutiny of the Prime Minister's finances has also brought IHT planning into focus. The Mail on Sunday revealed 'Cameron's tax bill dodge on mother's £200,000 gift.' While the the insinuation was of some wrongdoing, a closer look at the detail reveals a basic IHT planning device which is legitimately available to anyone.
So, stepping carefully over any political controversy – let's leave the rights and wrongs to the politicians and commentators – let's look at what the Cameron family did to reduce their IHT bill.
Under the terms of his Will, David Cameron's father, Ian, left a legacy of £300,000 to David. This was below the tax free allowance in force at the time. Most of the rest of Ian's estate passed to David's mother and therefore benefited from 'spouse exemption'. Gifts between spouses in life and on death are, in general, exempt from IHT.
Within a few months of the death, Mrs Cameron made gifts to David totalling £200,000. As these were gifts to an individual during her lifetime, there was no IHT to pay at the point the gift was made. Instead, the gift was a 'Potentially Exempt Transfer' or 'PET'. PETs made within 7 years of someone's death are added to the value of their estate, which may result in IHT being paid at that point. However, if Mrs Cameron survives 7 years, the gifts will not count as part of her estate and no IHT will have been paid.
By contrast, had the late Mr Cameron left David £500,000 in his Will, with the rest of the estate passing to Mrs Cameron, then the IHT bill would have been £70,000 (if it was deducted from the gift) or as much as £116,666 (if it was paid by the estate and David received the full £500,000).
From this we can see the importance of planning ahead when making provision for the next generation. Strategic lifetime gifts can make a big difference to your IHT bill. It is vital that couples who are married or in a civil partnership look at their combined estates and take advice about the best way to pass on their assets without incurring unnecessary IHT.
Incidentally, an alternative approach would have been for Ian to leave his whole estate to his wife, who could then have left David his legacy in her Will. Her estate would have benefited from her own tax free allowance plus the unused allowance transferred from her husband's estate. If she dies after 6 April 2017, her estate may also benefit from the new allowance for main residences (£100,000 for 2017/18) plus her husband's unused main residence allowance. The whole gift could therefore be covered by tax free allowances, subject of course to any other legacy she may leave. The downside is that David would still be waiting for his money, as Mrs Cameron is very much alive and well. In the circumstances, a lifetime gift provided the solution, subject to the obvious risk that Mrs Cameron might not survive 7 years.
If you would like to talk these issues through, Blake Morgan would be delighted to hear from you. We can help you plan for the future, negotiate the complexities of IHT and optimise the amount you can leave to the next generation. Contact the succession and tax team for further information.