Tom Makin was heir to the well-known JD Sports sporting goods empire prior to his tragic death. At the age of only 21 Tom was diagnosed with bone cancer, which would later claim his life. In 2019, aged just 29, Tom passed away leaving his wife, Kirsty, a widow at 34, and the couple’s two young children. A year before the couple got married, Tom transferred half of his property to Kirsty, believing that this would not attract any Inheritance Tax.
Spousal exemption from Inheritance Tax
Indeed, if Tom and Kirsty had been married at the time the gift was made, this would have been the case. Section 18 of the Inheritance Tax Act 1984 contains the spousal exemption from Inheritance Tax. It states that any gift made between spouses, whether during lifetime or on death, is exempt from Inheritance Tax. Unfortunately, however, they were not married at the time, and accordingly, Tom’s death has resulted in an Inheritance Tax bill of as much as £300,000.
The key issue in Tom’s case is that, at the time of transferring the half share of the property to Kirsty, the couple were not married, and therefore, the spousal exemption from Inheritance Tax did not apply. Had Tom waited until after their wedding or kept the property in his sole name and then left it to Kirsty in his Will, the substantial Inheritance Tax bill could have been avoided.
‘Potentially exempt transfer’
What Tom actually did by transferring the half share of his property to Kirsty was to make a ‘Potentially Exempt Transfer’, otherwise known as a PET. PET’s are referred to as ‘potentially’ exempt as, if the donor of the gift survives seven years from the date of the gift, it becomes exempt from Inheritance Tax, however Tom did not survive the requisite seven years.
For Inheritance Tax purposes, everybody has a Nil Rate Band allowance of £325,000 which is taxed at 0%. Where PETs have been made in the seven years prior to death, the value of the PET reduces the available Nil Rate Band allowance. Tom and Kirsty’s home is worth £1,800,000 and therefore the value of the PET was £900,000. This used up Tom’s entire Nil Rate Band allowance, and the remainder (£575,000) is therefore taxable at 40%.
Tom’s family are asking the High Court to posthumously rescind the gift of the property in order to reverse the £300,000 Inheritance Tax bill which Kirsty is now liable for, however there is the possibility that the Court could refuse. If the Court refuse and uphold the gift, it may be that Kirsty will have to sell the family home in order to cover the Inheritance Tax bill.
Tom’s family are now facing a Court case in an attempt to reverse a substantial Inheritance Tax bill which could have been avoided entirely had proper advice been taken at the time, and all at a time when they are grieving the loss of Tom.
This case clearly highlights the importance of taking proper legal and financial advice when making decisions such as these. A solicitor would have been able to advise Tom of the spousal exemption and the consequences of making the gift of the half share of his property to Kirsty at a time when the couple were not married, and advise that if he made the gift at that time he would then need to survive seven years in order for it to be exempt from Inheritance Tax.
It is also possible to memorialise an account on death. This enables family and friends access to the account so they can leave a message. It is common for people to include funeral wishes in their Will, but most will not have considered what message if any, can be posted on social media.
How can we help?
If you are considering making lifetime gifts, or wish to discuss Inheritance Tax planning, our Private Client Team can assist you.
This article was written by Jessica Newton, Solicitor in the Private Client Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of April 2021.