Inheritance Tax and Lifetime Gifts – ITV’s ‘Finding Alice’ explained

For those watching ITV’s ‘Finding Alice’, the show has raised questions for viewers concerning inheritance tax. In the very first episode, and throughout the series, the inheritance tax is discussed due to the death of a character, Harry.

It transpires that Harry transferred the family home into his parents’ name before his death. By gifting the property to his parents, Harry made a lifetime gift which becomes a Potentially Exempt Transfer (PET). PETs are potentially exempt because, if the donor survives the gift by seven years, the gift becomes fully exempt and will not affect the inheritance tax due on the donor’s death. However, if the donor does not survive the gift by seven years, this will affect the inheritance tax due – particularly if the gift exceeds the deceased’s Nil Rate Band.

Every individual has a Nil Rate Band, meaning that the first £325,000 of your estate will not be charged to inheritance tax. The Nil Rate Band will be reduced by failed PETs (i.e. made within the last seven years). The value of these failed PETs may use up all or part of the donor’s Nil Rate Band, and therefore may result in either the estate being chargeable to inheritance tax where it might not have been (had the gift become exempt), or a larger inheritance tax bill being due because the estate only has the benefit of a reduced Nil Rate Band or no Nil Rate Band at all. If the failed PETs exceed the Nil Rate Band, the value of the PETs exceeding the Nil Rate Band will also attract inheritance tax. The amount of tax charged depends on the length of time between the date of the gift and the date of death due to taper relief, whereby the tax due on a PET (rather than the value of the PET) is tapered depending on the length of time that has passed. Back to the show, Harry’s parents suggest that they need to sell the family home to pay the inheritance tax bill. The suggestion is that the tax is payable by them rather than the estate. This is the case where the failed PETs exceed the deceased’s available Nil Rate Band; the inheritance tax on these gifts is technically payable by the recipient of the gift, rather than the estate itself.

However, Harry’s situation is further complicated by the fact that Harry and the family continue to live in the property after this is transferred into his parents’ name. This is Gift with Reservation of Benefit (GROB) and there are anti-avoidance provisions in place to prevent individuals from avoiding inheritance tax by gifting while still benefitting from the assets that have been given away. If the deceased has continued to enjoy or benefit from the asset at their death, the property will be subject to inheritance tax as if it were part of his estate. The result of this is that regardless of the above rules regarding PETs, provided the deceased benefitted from the property at the time of his death (making the gift a GROB), the gifted asset will form part of his estate for inheritance tax – even if the original gifting of that asset has been survived by seven years.

The show raises other interesting legal quandaries, such as Harry and his partner being unmarried, the application of the intestacy rules given that Harry did not have a Will in place, as well as previously unknown children becoming known, including (spoiler alert!) those perhaps fathered by sperm donation. Harry’s partner, Alice, also refers to Probate as “gibberish”, which many family members will likely agree with.

If you would like further advice on the impact of lifetime gifting, inheritance tax and estate administration, contact the Private Wealth team at Moore Barlow.