There has been a lot of talk about the gift and estate tax exemption, currently $11.7m, being cut by half. Although nothing is guaranteed, we expect this to come into force as of 1st January 2022. If the allowance is not utilised before the end of the year, it will be lost.
We have summarised the things you need to think about here.
We have run through a client example here to show the tax implication of not using the allowance and how this can impact your net worth.
Background
Our long-term client approached us looking for planning advice, he was exploring the planning opportunities available regarding the $11.7m.
In summary:
- The family are US citizens resident in the UK
- They have two children of adult age
- They have been living in the UK for 22 years
- Total assets of $15.5m ($13.5m in joint investment, $2m UK property)
He was planning on making gifts in the next few years to his children, but the potential change in estate tax has accelerated the need to do so.
Cashflow analysis
Step one was to undertake a full cash flow analysis, the reason behind this was to determine how much could be gifted away whilst maintaining their current lifestyle and not drawing down capital.
We modelled three different gifts levels to see how this would impact the client:
01 Current Position – No Gift
Running the figures through our cashflow model ,we can see that the total income produced, exceeds the income required. Initially the income was c.$100,000 greater than income required. Over time with re-investment this increases to over $150,000.
02 Full use of the exemption – $11.7m Gift
The second scenario was to use all the lifetime allowance. This pushes the current income levels under the required amount, forcing the client to draw from the main pot and eroding the capital.
03 The Middle ground – $8m Gift
For this family we settled on a gift of $8m. This amount allowed the family to utilize a big chunk of the “use it or lose it” allowance, whilst maintain their personal income requirements, and without drawing into the capital pot.
How would this have changed if the gift was made after the rule change?
The numbers really do speak for themselves. There are a lot of “ifs” but on the basis these things are followed through the saving to our client was $800,000
UK Tax Implications
It is important to note that the client is UK tax resident. This means the client will likely be captured within the scope of UK inheritance tax, however due the client’s age and health we assume a Potentially Exempt Transfer (PET) occurs. Under UK IHT (Inheritance tax), if an individual survives for at least 7 years after making the gift, the gift will be considered outside of the estate for the purpose of Inheritance tax.
