Insights

By order of the Peaky Blinders … beware, spoiler alert

Following Tommy Shelby’s terminal diagnosis, those watching BBC’s final season of Peaky Blinders might be wondering how Tommy intends on distributing his estate and preserving his wealth by mitigating potential inheritance tax (“IHT”) liabilities. There are various options to explore when looking to mitigate a future IHT bill, a common one being lifetime gifting.

Let’s fast forward 90 years and assume Tommy passes away on 30 April 2022. Despite being unaware of his imminent diagnosis, Tommy had been mindful of mitigating a potential IHT bill and made various gifts to family over the years. As he no longer benefitted from those gifts and he’d hoped to survive at least the required 7 years, he’d assumed the gifts would be out with his estate on death. Let’s look at how Tommy’s gifts would be treated from an IHT perspective taking into account taper relief and various exemptions/allowances.

• Gift 1 of £400,000 to wife Lizzie Shelby on 1 January 2017 (over 5 years)
• Gift 2 of £50,000 to brother Finn Shelby on 1 July 2017 (over 4 years)
• Gift 3 of £350,000 to brother Arthur Shelby on 2 February 2018 (over 4 years)
• Gift 4 of £100,000 to sister Ada Thorne on 30 November 2018 (over 3 years)
• Gift 5 of shares worth £500,000 in the Shelby Company Limited to sister Ada Thorne on 1 January 2019 (over 3 years)

Disclaimer: The above scenario has been prepared on the assumption that Tommy Shelby’s source of wealth was legitimate!

Gifting and Taper Relief

Gifting is a common estate planning tool when looking to mitigate your potential Inheritance Tax (“IHT”) liability. It’s widely known that when making a gift, you must survive 7 years for the gift to be deemed out with your estate for IHT purposes (subject to other conditions).

But what about taper relief?

When discussing potential gifting with clients like Tommy we’re increasingly being asked about taper relief. Taper relief comes into play when a gift was made more than 3 years before the gifter’s death.  It offers a percentage reduction in the tax payable.

The “Sliding Scale”

Gifts made in the 3 years before death which exceed your Nil Rate Band (“NRB”), which is currently set at £325,000, are taxed at 40%. Gifts made 3 to 7 years before death are taxed on a sliding scale. The tax rates are shown in the table below:

Available only where the gift exceeds £325,000

It seems to be a common misconception that the sliding scale can be applied to any gifts made.  However, the sliding scale is not available where the gift is within the NRB. Gifts under £325,000 cannot benefit from taper relief.

Tax Treatment for Tommy’s Estate

So how does this all apply to Tommy’s lifetime gifting?

Gift 1 to Lizzie Shelby

Gifts made between spouses or civil partners are not subject to IHT meaning that Tommy’s gift to his wife will not attract an IHT charge. Lizzie should think about the gift forming part of her own estate and take appropriate IHT advice.

Gift 2 to Finn Shelby

Tommy survived over 4 years following the gift of £50,000 being made to Finn, however the value of the gift is below the available NRB at date of death so taper relief cannot be applied. Tommy hadn’t used any of his available NRB so there is no tax to pay on the gift.

Gift 3 to Arthur Shelby

Tommy survived over 4 years following the gift of £350,000 being made to Arthur. As the gift is over the NRB, taper relief can be applied. The calculation would be as follows:

Value of gift  £350,000

Remaining NRB available following deduction of Gift 2  -£275,000

Value of gift chargeable to IHT  £75,000

Tax at the full 40% rate would be £30,000. As taper relief can be applied, the gift is taxed at 24% meaning the IHT payable would be £7,200.  Taper relief can therefore offer significant tax savings.

Gift 4 to Ada Thorne

As the gift is below the NRB, taper relief is not available. Tommy has used all of his available NRB so the gift will be taxed at the full 40% rate (£40,000).

Gift 5 to Ada Thorne

The gift of company shares to Ada meets all of the requirements to attract Business Property Relief at a rate of 100%. Accordingly, there is no IHT to pay on the gift of company shares.

Conclusion

When you are making gifts as a form of tax planning, to ensure your potential gifts have the intended tax consequences we would recommend seeking professional advice. For more information on gifting or estate planning more generally please contact a member of our Private Client team.