We’re all going on a summer holiday …
A recent Q&A article in the Telegraph raises a fascinating question: is there any scope for inheritance tax (IHT) planning by paying for a major family holiday?
The question notes that if a gift of money were to be made to family members to enable them to pay for the trip themselves, that would undoubtedly be a potentially exempt transfer (PET) which would be subject to IHT if the donor were to die within seven years, but asks whether the position would be any different if the donor were to pay for the trip himself.
IHT is based, as the article points out, on the principle of the loss to the donor. The definition of a PET is based on the concept of a ‘transfer of value’ which in turn is defined as a ‘disposition made by a person … as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.’
A few years ago it was noted on a trust practitioners' forum that there is no statutory definition of the word ‘disposition’. It was argued that the Oxford English Dictionary definition involves the concept of a transfer or a distribution, and that if there is no receiving party, there is no disposition (and therefore, circling back to the IHT legislation, no transfer of value).
It seems to be reasonably uncontroversial that if A pays for a holiday for herself and a carer or companion, there is no PET to the companion, because the companionship is provided for A's benefit. But could one not extend that concept to that of an extended family holiday?
Could it not be argued that A has chosen to spend her money on the pleasure of having her entire family with her on the holiday; and that any benefit to the family members, whose primary reason for participation is arguably to facilitate a happy experience for A, is incidental?
The argument has been made that if A pays for an extravagant dinner for friends and family, that must surely not be seen as a gift for IHT purposes. On the other hand, if it is a disposition, it has been argued that a disposition needs to have a ‘gratuitous intention’, distinguishing between treating a friend to lunch (which is a disposition and therefore potentially a PET) and when two friends take turns paying (which is not).
Similar questions could arise where A pays for a lavish wedding costing £500,000 for her son, C. Is A paying for the wedding to discharge what she regards as her cultural and/or family obligations? Perhaps it can be argued that paying for a holiday has the requisite gratuitous intention, but paying for a wedding where, perhaps, there is an element of duty or obligation (for cultural or family reasons) is not.
If A’s paying for the wedding is a gift, is it a gift to C? Or a gift to C and his new wife D? Or indeed to C, D and all the guests who enjoyed several days of feasting and celebration? What if the marriage breaks down after two years and A dies soon thereafter? If it is a PET, it has failed as a result of A’s early death, and IHT will be payable on her death on the excess over the £325,000 nil rate band of the value of the transfer. The donees are primarily liable for the IHT on a failed PET. But the marriage having failed, D might well resist the argument that she was the recipient of a gift.
The answers are not clear but it remains the case that it must be sensible to make use of the available exemptions and reliefs. A once-in-a-lifetime dream holiday might be a one-off, but more modest annual trips with the children and grandchildren could qualify for exemption as normal expenditure out of income. Ultimately, the tax tail should not wag the dog, and whilst the cautious approach (to help your executors in due course) is to keep a careful record of anything which could be reportable as a lifetime gift, you should, if you can afford it, spend the money on experiences which you and your family/friends will enjoy - whether or not you achieve any tax saving in doing so!
