When David Cameron’s father died, he left an estate worth £2.74million. In accordance with his Will £300,000 passed to the PM, a £1million property passed to his daughters and the remainder of his estate passed to his wife.
Four years before Mr Cameron Senior’s death, he also transferred his family home worth £2.3 million to his eldest son as part of a house swap arrangement. A year after Mr Cameron Senior’s death, the PM received a further £200,000 from his mother.
The PM has been highly criticised for this £500,000 ‘tax free’ inheritance but it is perfectly legitimate inheritance tax (IHT) planning and highlights the benefits of such planning.
Current IHT rules dictate that a person's estate is subject to IHT to the extent that it exceeds the IHT Nil Rate Band threshold, currently £325,000. Anything in excess of this amount is subject to 40% IHT.
The value of any assets passing to a spouse or civil partner in a Will or on Intestacy (being the rules that apply where there is no Will) are exempt from IHT. This is the case no matter how great the value passing and therefore any assets passing to the PM’s mother from his father’s estate will not have been subject to IHT.
The gift of his property made by Mr Cameron Senior to his eldest son during his lifetime will have been taken into account when calculating the IHT due on his estate. This is because the gift was made within 4 years of Mr Cameron Senior’s death and is therefore a failed Potentially Exempt Transfer (a ‘PET’). A PET is a lifetime gift made which only becomes chargeable and will use up all or part of the donor’s (i.e. the person making the gift) IHT Nil Rate Band if that donor dies within 7 years of making that gift. If the donor survives the gift by 7 years then its value falls outside of the estate for IHT purposes and the full IHT Nil Rate Band remains intact.
There is a relief available on the amount of tax payable on a failed PET which reduces the amount of tax payable. The relief is called Taper Relief and the reduction in tax is based on a sliding scale of 0% to 100% depending upon the number of years between the gift and the death of the donor. The longer the donor survives after making the gift (subject to surviving at least three years), the lower the IHT. This means that the amount of IHT payable on the gift of Mr Cameron Senior’s home to his eldest son is likely to have benefited from a reduction of between 20-40% of the IHT payable, depending upon the exact date upon which the gift was made. Furthermore, the fact that Mr Cameron Senior and his eldest son swapped houses may also have reduced the value of the chargeable gift.
The assets passing to Mrs Cameron Senior from her husband’s estate will not have been taxed when passing to her from the estate. However, if she continues to own them at the date of her death they will be subject to IHT to the extent that their value exceeds the available Nil Rate Band. Although, further IHT planning will help to reduce the tax and Mrs Cameron Senior would appear to already be taking action to reduce the value of her estate for IHT purposes by passing £200,000 to the PM during her lifetime. Again, this gift will be a PET and therefore if Mrs Cameron Senior survives that gift by 7 years it will fall outside of her estate for IHT purposes saving in the region of £80,000 IHT. However, if she dies within 7 years, it will be taken into account when calculating the IHT due on her estate as it will use part of her IHT Nil Rate Band.
There are other IHT exemptions and reliefs available and with some forward planning, the IHT payable on an estate can be drastically mitigated. To find out more about what you can do to reduce your IHT bill, it is worth seeking advice from a member of our Private Client team.