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Question of the week: Inheritance tax on house deposits for three kids?
MSE_Jenny
Posts: 1,321 MSE Staff
Q. If we paid the deposit on a house for each of our three children, would this money be exempt from inheritance tax? Lin
Martin's A. While you're alive, you can give genuine no-strings gifts to your family without any tax to pay at all.
The inheritance tax (IHT) rules only come into play if you die within seven years of giving the gift. This is to prevent people making gifts just before they die to escape tax.
So the golden rule is try to survive more than seven years; this why early planning of how to pass on your assets is important. Living longer is often a good idea anyway!
Yet if you died within the time limit, there will be IHT to pay; it’s a tax on any assets (meaning money or property) you leave to some one when you die.
At death, you can leave £325,000 before any tax is payable, though there's no tax at all if it’s left to a spouse. Above that, you pay 40%, eg, if you leave £500,000, then your estate/beneficiaries will pay 40% of £175,000 (£500k minus £325k), which is £70,000.
Yet if total gifts are bigger than the threshold, and are given away three to seven years before death, the actual rate decreases, the longer ago it was given away. There are, as with all these things, lots of ways round it though.
Further Reading: The Inheritance Tax guide.
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Martin's A. While you're alive, you can give genuine no-strings gifts to your family without any tax to pay at all.
The inheritance tax (IHT) rules only come into play if you die within seven years of giving the gift. This is to prevent people making gifts just before they die to escape tax.
So the golden rule is try to survive more than seven years; this why early planning of how to pass on your assets is important. Living longer is often a good idea anyway!
Yet if you died within the time limit, there will be IHT to pay; it’s a tax on any assets (meaning money or property) you leave to some one when you die.
At death, you can leave £325,000 before any tax is payable, though there's no tax at all if it’s left to a spouse. Above that, you pay 40%, eg, if you leave £500,000, then your estate/beneficiaries will pay 40% of £175,000 (£500k minus £325k), which is £70,000.
Yet if total gifts are bigger than the threshold, and are given away three to seven years before death, the actual rate decreases, the longer ago it was given away. There are, as with all these things, lots of ways round it though.
Further Reading: The Inheritance Tax guide.
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Comments
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Hi luiccia,
Thanks for your feedback on this. The HMRC website says that, if you died 3 - 7 years before giving the gift, and the gift was over the IT threshold in the year you died, then you get tiered relief on the tax:
http://www.hmrc.gov.uk/cto/customerguide/page13-1.htm
If you let me know which part of the answer is misleading, we'll take another look
Thanks
DanFormer MSE team member0 -
Cool, have made a slight editFormer MSE team member0
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Q. If we paid the deposit on a house for each of our three children, would this money be exempt from inheritance tax? Lin
Martin's A. While you're alive, you can give genuine no-strings gifts to your family without any tax to pay at all.
The inheritance tax (IHT) rules only come into play if you die within seven years of giving the gift. This is to prevent people making gifts just before they die to escape tax.
So the golden rule is try to survive more than seven years; this why early planning of how to pass on your assets is important. Living longer is often a good idea anyway!
Yet if you died within the time limit, there will be IHT to pay; it’s a tax on any assets (meaning money or property) you leave to some one when you die.
At death, you can leave £325,000 before any tax is payable, though there's no tax at all if it’s left to a spouse. Above that, you pay 40%, eg, if you leave £500,000, then your estate/beneficiaries will pay 40% of £175,000 (£500k minus £325k), which is £70,000.
Yet for gifts bigger than the threshold, given away three to seven years before death, the actual rate decreases, the longer ago it was given away. There are, as with all these things, lots of ways round it though.
Further Reading: The Inheritance Tax guide.
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......... Another thought.... If the settlor's estate was likely to be subject to inheritance tax, possibly the simplest solution would be for the settlor to take a 7 year term assurance for an amount equal to 40% of the total amount of the gifts and written in Trust so that it does not form part of the estate.
Then if death occured within 7 years, the policy would meet the IHT on those gifts....effectively out of the estate from day one?
Assuming good health and age, the premiums could be well worth it!
SamI'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, but my comments here and on Legal Beagles as Sam101 are just meant to be helpful. Do ask questions from the Members who are here to help.0 -
On a more practical level, there is a case to be made for supplying the sum in a series of small transfers. Never mind the fairly remote IHT implications, it avoids questions from the money laundering thought police.
........together a couple can currently leave £624,000 tax-free. This is still appearing in the on the The Inheritance Tax guide. It makes tyhe worked example confusing.
For a tax that dates back into the mists of time (I have an example of a return from the 1840's) this table gives an insight into the value of money over time.
http://www.hmrc.gov.uk/rates/iht-thresholds.htm0 -
John_Pierpoint wrote: »........together a couple can currently leave £624,000 tax-free. This is still appearing in the on the The Inheritance Tax guide. It makes tyhe worked example confusing.
Thanks for that, missed that rogue mention!
Former MSE team member0 -
......... Another thought.... If the settlor's estate was likely to be subject to inheritance tax, possibly the simplest solution would be for the settlor to take a 7 year term assurance for an amount equal to 40% of the total amount of the gifts and written in Trust so that it does not form part of the estate.
Then if death occured within 7 years, the policy would meet the IHT on those gifts....effectively out of the estate from day one?
Assuming good health and age, the premiums could be well worth it!
Sam
But beware - if there is an IHT liability and the person who took out the policy dies within 7 years, even if the policy has been written in Trust, then the PREMIUMS will be taken into account for IHT purposes. By writing it in Trust the payout is safe but the premiums paid are deemed to be gifts as they are of no benefit to the policyholder. I know - we found out the hard way last year. Policy is still an axcellent idea but you do need to be given the full facts when taking it out which were not.0 -
Bramblegirl wrote: »But beware - if there is an IHT liability and the person who took out the policy dies within 7 years, even if the policy has been written in Trust, then the PREMIUMS will be taken into account for IHT purposes. By writing it in Trust the payout is safe but the premiums paid are deemed to be gifts as they are of no benefit to the policyholder. I know - we found out the hard way last year. Policy is still an axcellent idea but you do need to be given the full facts when taking it out which were not.
......... The premiums on such a policy could be considered as 'Normal Expenditure Relief' if they did not reduce the normal standard of living, so would not be counted as part of the estate and not deemed as gifts.
Only in very exeptional; circumstances would this change
SamI'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, but my comments here and on Legal Beagles as Sam101 are just meant to be helpful. Do ask questions from the Members who are here to help.0 -
......... The premiums on such a policy could be considered as 'Normal Expenditure Relief' if they did not reduce the normal standard of living, so would not be counted as part of the estate and not deemed as gifts.
Only in very exeptional; circumstances would this change
Sam
I would still check very carefully all information on this one. My solicitor checked and discussed with HMRC at length this very question and even though the premiums, although large, definitely did not "reduce the normal standard of living" for my Mother they were not exempt as claimed by SeniorSam! HMRC have been relentless in claiming every scrap of tax from very open accounts. I just think people need to be aware of all the facts.0
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