Record keeping – the vital element to saving IHT

Estate Planning and Probate

Giving away your wealth is the simplest way to reduce the inheritance tax (IHT) bill on your estate. But what records should you keep now to ensure that when the time comes it’s easy for your executors to prove that the gifts are exempt?

No extra records

In 2009 HMRC had the idea that anyone who wanted to claim an IHT exemption would need to keep records in precisely the way it suggested and submit a claim within set time limits. That idea was scotched because it was largely impractical. However, some record keeping is essential if you want your executors to be able to successfully claim IHT exemptions.

Readymade IHT schemes

Where you buy into an IHT saving scheme, these are mainly sold by insurance companies and banks, there will be paperwork, e.g. policy documents etc., which your executors can refer to. Additional records aren’t usually needed, but it’s good practice to attach a note to the documents to draw your executor’s attention to the purpose and nature of the scheme/investment.

Gifts

Gifts made within seven years of your death are the real trouble area. While various exemptions can apply where you give away cash or assets, e.g. shares, antiques, etc., chances are, without more information your executors will have little option but to treat these as part of your estate for IHT purposes. This means your attempts to reduce your IHT bill will have been pointless.

How will they know?

Executors are required to check your financial records, this can include bank statements, to see whether you’ve transferred any assets within the previous seven years that might count as a gift.

Which gifts should you record?

Because of the way in which most IHT exemptions work, it’s easier to say what gifts you don’t need to record. Where the total value of all gifts you make is no more than £3,000 in a single tax year, you don’t need to keep a note of them. This is because gifts up to that value are covered by your annual IHT exemption. This is automatically allowed by HMRC and it’s OK for your executors to ignore them. Where you don’t use part or all of your annual IHT exemption in one year, you can carry it forward to the next, but no further than that. If you intend to do this, keep a record, otherwise your executors must assume that gifts exceeding £3,000 in value in the year are potentially liable to IHT.

All other gifts and exemptions

The value of all gifts that, by themselves or together, exceed your annual IHT exemption should be recorded, even if you believe them to qualify for another exemption. While there are no rules on how to record gifts and precisely what information is needed, we think the best way is to follow the format which HMRC expects executors to use when filling in IHT returns. This is set out on its Form IHT403. Tell your executors and beneficiaries that you have kept records and make sure they know where they can be found.