Painting a picture of the perils within inheritance tax

A gift does not automatically become exempt from UK Inheritance Tax after seven years and in this situation the painting is likely to remain in the parents’ estate.

My parents own a painting that has been in my family for more than 100 years. They have decided to give it to me now to reduce the value of their estate so that there is less tax to pay when they die, but as I live in Abu Dhabi and am likely to move to the Far East before eventually returning to the United Kingdom, I don’t want to physically take the picture and would prefer for it to stay in their house. I am aware that it takes seven years for the gift to be exempt from taxes, but is there a problem with the painting staying in their home for safekeeping? They have written a formal letter confirming change of ownership and the painting was recently valued at £60,000 (Dh362,000). RH, Abu Dhabi

A gift does not automatically become exempt from UK Inheritance Tax after seven years and in this situation the painting is likely to remain in the parents’ estate. All the time it remains in their home it is deemed a “gift with reservation of benefit”. The rules are that if an individual makes a gift, but retains any benefit in that asset, Her Majesty’s Revenue & Customs (HMRC) will still regard the asset as belonging to that individual on death and will tax it as such – at up to 40 per cent of the value at that time. A good example of this is if an individual gives their house to their children, but continues to live in it without paying a full market rent. The idea of paying a full market rent is often not viable but it may be the best solution for items such as paintings and other chattels, with the idea that the parents, having given away ownership of the painting, then lease it back at the full market rent. The normal rental amount for such items is usually between 0.5 and 1 per cent of the capital value, so in this case between £300 and £600 a year, a figure far less than any potential tax liability even over many years. A professional valuation must be obtained and there has to be a proper legal agreement in place that allows for future revaluations and rent reviews in line with market values. Note that the rental of the painting is considered UK income and there may be a tax liability.

Keren Bobker is an independent financial adviser with Holborn Assets in Dubai. Contact her at keren@holbornassets.com

Published: January 17, 2014 04:00 AM

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