Inheritance Tax: Gifts for maintenance of family
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Gifts for the maintenance of family is a very useful exemption to inheritance tax (IHT) rules but one that is commonly misunderstood. Most of the misunderstandings centre around the meaning of the concept of ‘family’. The common interpretation is that you can give to your ‘family’ without IHT consequences.
The definition of family, however, is far more limited than that used in general language, and is broadly only for partners, parents and children. The provisions centre around four different types of dispositions to family: to one’s spouse or civil partner (legal partner), to one’s children, to children that are not the natural children of the donor, and to dependent relatives. Each type of disposition is slightly different in its scope and the nature of gift exempted.
To a legal partner
Usually, gifts for the maintenance of one’s legal partner are not very useful or interesting when the couple are still together, due to the unlimited free transfer of gifts for IHT purposes between legal partners. Given that transfers can be made IHT free anyway, there is no need for the gifts to be confined to the maintenance of family category.
However, there is one group of legal partners that may find this category very useful, and that is where a UK domiciled partner gifts to a non-UK domiciled partner. The inheritance tax relief in this situation is limited to a lifetime transfer of only £325,000. Beyond this, gifting is chargeable, so for them, the maintenance of family category could be extremely useful.
Furthermore, if the couple are divorcing or having the civil partnership annulled, and the gift is on the occasion of the end of the partnership, maintenance payments made as a result of the financial order can also come under this exemption. This means in certain circumstances, the legal partner can also be an ‘ex’ and not current partner.
When the maintenance of family concession is being used for a legal partner, the legislation restricts these transfers to the ‘maintenance’ of the other party. Although maintenance is not defined in the legislation, case law sheds some light on it, albeit in descriptions of other taxes and sometimes in other territories.
For example, in the UK case Milward v Shenton (1972) 1 WLR 711, the judge referred to a Canadian case Re Duranceau (1952) 3 DLR 714 at 720, where it was stated that the question to be asked was: ‘Is the provision sufficient to enable the dependent to live neither luxuriously nor miserably, but decently and comfortable according to his or her station in life?’
Maintenance is generally seen, therefore, to mean providing food, clothing and a roof over one’s head, which depending on the lifestyle of the donee, could mean that maintenance for one person’s legal partner may require a different level to maintenance of another’s.
To one’s children
The maintenance of family concession available to the donor’s own children is more generous than to the legal partner, insofar as it is available not only for the maintenance but also for the education and training of the child.
A donor’s own children includes biological children, stepchildren and adopted children of either of the couple. It also includes illegitimate children, but this is restricted to those of the donor only.
The child needs to be legally a minor, so payments are only covered until the child turns 18, unless they continue to follow a full-time educational programme, in which case the transfers can be made until the programme has ended.
For example, if the transfer is made to a child who is a 22-year old having attended university straight from school, and is still attending tertiary education, say, studying for a PhD, the maintenance of family payments may still be ignored for IHT purposes.
Although the child working part-time during their full-time study will not hamper the eligibility of the concession, if they leave full-time education but later return, in HMRC’s opinion this would cause any transfer to be ineligible under this section.
Minor children who are not children of donor
Where a transfer is made to a minor child, or a child passed their majority who is in full-time education by someone that is not their parent, this may also be covered depending on the circumstances.
If it is made to a minor child, the only condition is that the child must not be in the care of either of their own parents, and ‘parents’ here includes step and adoptive parents. It does not matter who makes the transfer.
For example, if a child has been abandoned by their parents or their parents have passed away, and say, they were living with their grandmother, if an aunt transfers to this child, this transfer would be ignored under the maintenance of family category.
If it is made to a child passed their majority who is still in full-time education, there is an additional condition. The child must have spent ‘substantial periods’ in the care of the donor before they reached 18. In the example above, the aunt then, would not be able to make further payments without IHT implications to the child once they turned 18 even if they were in full time education, as the child has not been under her care for substantial periods in the child’s minority.
The grandmother on the other hand, could continue to make payments without consideration of IHT as the child had a ‘substantial period’ under her care before the age of majority.
To dependent relatives
Dependent relatives have yet another description surrounding the purpose or motive for the gift. When considering these transfers, they will be ignored where a ‘reasonable provision’ has been made for the dependent relative’s ‘care and maintenance’.
Note the addition of the word reasonable, and also the word care in addition to maintenance. Again, these words are not defined in the provisions, but as outlined above, maintenance relates to nutrition, clothing and accommodation. Care, however, could extend, as it does in the Oxford English Dictionary to health, welfare and protection, which gives more scope than simple maintenance.
HMRC see this as the classic meaning of care such as ‘going into care’ in a private or other institution. ‘Reasonable’ broadly means that which is required but no more.
A ‘dependent relative’ is not however any aunt, cousin or other relative who is in need. The category is restricted to a relative of either of the couple, incapacitated by either old age or infirmity from maintaining themselves.
HMRC would only consider a relative incapacitated if the need was for financial as well as physical help. In other words, a billionaire uncle who could no longer physically feed himself due to a stroke would not be a relative incapacitated by infirmity from maintaining themselves as they could pay a carer to do it for them.
The second type of recipient is the transferor or their legal partner’s mother or father if they are dependent, for any reason. They do not need to be incapable of maintaining themselves but any payment must be reasonable.
Although it sounds like maintenance of family is a broad and far-reaching concession available to all members of the extended family, it is actually far more restrictive. However, by working within the legislation, a donor can still give a wealth of help to
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