Can I avoid inheritance tax by taking my family on £100k trips?

Mike Warburton advises a reader who wants to invest in shared experiences rather than give money

QI am a healthy 77-year-old and my estate will definitely be subject to inheritance tax (IHT) when I die. Several years ago, at a family meeting, the beneficiaries of my will ( i.e. my daughters and grandchildren) said that they’d prefer me to spend it on shared experiences rather than giving them money now. Since then we have been to the US and to Japan spending about £ 100k on each trip. They created great memories and, actually, changed the course of my grandson’s education. I now intend another major trip or cruise with them all around Italy which will cost more than £100k.

Of course I could give them the money to pay for the trip themselves. But if I die within seven years that would undoubtedly be subject to IHT.

But what is the position if, as I have done in the past, I pay for the cruise myself?

– Anon

Dear Reader

AThank you for raising this interesting question. Before I answer it, I would like to make a couple of points for our readers. First, this is a genuine question. We do not invent them, as some readers have suggested. Second, I need to keep your identity confidential but want readers to appreciate that you are a highly successful self- made businessman and a nationally recognised leader in your field. The Telegraph has always supported success in entrepreneurial business and the financial consequences flowing from that. You deserve the wealth you have created to use as you wish. I know that this includes the support you give for a number of charities. I am saying this to put in context your plan to spend £100,000 a year to provide spectacular holidays with your family.

It is entirely natural for those who can afford it to indulge their family and friends on occasions. In doing so I doubt that many think about the possible tax consequences. At a basic level IHT can apply where there is a transfer of value by the person making the transfer (the donor). Specifically, IHT is based on the principle of the loss to the donor rather than the benefit to the recipient. This usually applies to gifts of cash, property, investments or other assets but it is not restricted to that. For example, it can include failing to do something that results in a fall in the value of your assets. The definition is widely drawn and includes associated operations.

In applying the rules, a degree of common sense is appropriate.

If you take a friend out for lunch, nobody would expect that to be treated as a gift for IHT purposes. Even if you booked an expensive hotel and invited friends and family for a big celebration, I don’t think HMRC would regard that as relevant for IHT. For IHT to arise there must be an intention for a payment to provide a gratuitous benefit.

After my father died my mother had several holidays where she paid for a friend to join her as a companion. I did not regard that as a gift because the

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Use our tool to see how much you’re likely to owe companionship provided was for her benefit. However, I cannot find any court cases or references in the HMRC manual which specifically deals with your situation. I think that you would be caught by the general principle above. You will have made a transfer of value by paying the costs for your family members that your daughters would otherwise have incurred themselves. In addition, you have said that paying for these holidays is an alternative to making cash gifts to your daughters.

In my view the payments, excluding your own share, will be treated as gifts. These will be treated as potentially exempt transfers to the extent not covered by the exemptions available and will follow the normal seven-year rule. The most valuable of these exemptions, I suspect, will be the relief for regular gifts out of income. These holidays are planned to take place on a regular basis and I suspect your standard of living will not be reduced as a consequence.

I do not know your income but I suspect that you have surplus income over and above your expenditure. To the extent that these costs are coming from surplus income, the IHT exemption should apply. I decided to check my view with our Telegraph legal guru, Gary Rycroft, who agreed with me.

However, he correctly noted that much depends on the facts including whether you could go on holidays with no assistance, or whether the family are offering a caring or supporting role.

Your question raises a fundamental issue. When inheritance tax, or capital transfer tax as it was originally known, was introduced in 1975 it was intended to be a tax on the rich. Most people were protected by both a sizable nil rate band as well as the annual exemption and an exemption for small gifts.

It is not always appreciated that within the original legislation there is a requirement for the nil rate band to increase each year with inflation unless parliament specifically decides otherwise. One of the major problems many families are now facing is due to the failure of successive governments to honour this.

The current £325,000 has not been increased since 2009. Had it risen with inflation since then it would now be £ 675,000, and this freeze is set to continue. Likewise, the annual exemption of £3,000 has not been increased since 1981. With inflation it would now be over £15,000. The small gifts exemption of £ 250 has not increased since 1980 and should now be £1,400.

Reform of IHT is long overdue but in particular, Parliament needs to make appropriate adjustments to the amount of these exemptions. I am concerned that this trend will result in more intrusion into our private financial affairs.

I also question the wisdom of a law that could require executors to delve deeper into the last seven years of a deceased client’s life to establish whether any additional IHT arises.