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    • BBJ
    • By BBJ 14th Sep 17, 10:21 AM
    • 3Posts
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    BBJ
    IHT and the 7 year rule
    • #1
    • 14th Sep 17, 10:21 AM
    IHT and the 7 year rule 14th Sep 17 at 10:21 AM
    I hope I am posting to the correct forum.

    I understand from Martin's blog that a spouse's IHT allowance passes to their spouse on his/her death.

    Can anyone tell me if the same applies to the rule whereby gifts that are made 7 years or more before the donor's death are IHT free? Specifically I have shares in a private company I want to donate to my children. If I die within 7 years of doing so but my wife survives for more than 7 years (we are both 70), will that gift be counted as having come from her and therefore be IHT free?

    Thanks for any light anyone can shed on this.
Page 1
    • xylophone
    • By xylophone 14th Sep 17, 11:13 AM
    • 23,419 Posts
    • 13,611 Thanks
    xylophone
    • #2
    • 14th Sep 17, 11:13 AM
    • #2
    • 14th Sep 17, 11:13 AM
    http://www.pruadviser.co.uk/content/knowledge/technical-centre/transferable_nil_rate_band/

    http://www.scottishwidows.co.uk/Extranet/Literature/Doc/55012

    If the PET fails, the value of the gift reduces the percentage of NRB available for transfer.

    You should also be considering the CGT implications of your gift.


    You may also need to look at the company's articles concerning gifts/transfer of shares.

    In your position, I would consult a solicitor and tax accountant before taking any action.
    • Aegis
    • By Aegis 14th Sep 17, 11:16 AM
    • 4,773 Posts
    • 2,876 Thanks
    Aegis
    • #3
    • 14th Sep 17, 11:16 AM
    • #3
    • 14th Sep 17, 11:16 AM
    Do the private company shares count as Business Property? You may be eligible for another form of relief if so.

    https://www.gov.uk/business-relief-inheritance-tax
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
    • bowlhead99
    • By bowlhead99 14th Sep 17, 11:37 AM
    • 6,886 Posts
    • 12,393 Thanks
    bowlhead99
    • #4
    • 14th Sep 17, 11:37 AM
    • #4
    • 14th Sep 17, 11:37 AM
    The UNUSED proportion of a spouse's nil rate band can be transferred to the surviving spouse after the first one dies.

    If you were to die with all of your nil rate band unused (e.g. because your shares were transferred to your kids MORE than 7 years before you died, and so don't use up any of your nil rate band... and all the other assets you own were transferred to your spouse on death as rather than going to other people, which as an exempt transfer wouldn't use up any of your nil rate band either) then 100% of your nil rate band would be available to be transferred to your spouse on their later death. So then when your wife later passes away, she has all of her regular nil rate band at whatever £ amount that's worth in the year she dies, and she has 100% of an extra nil rate band on top. So altogether she would have 200% of the standard nil rate band available for that year.

    E.g., spouse 1 dies with the full £325k of their £325k nil rate band, unused because of the circumstances above: 100% unused. Spouse 2 dies a decade later at which point the standard nil rate band happens to be £350k, and spouse 2's executors fill in a form to get 100% of an extra standard nil rate band on top (another £350k), so have £700k of nil rate band available in total.

    However in the situation you describe:

    Mr BBJ gives away £250k of shares to his kids tomorrow and then dies six years from that point. It's a 'potentially exempt transfer' as it will be exempted if he survives 7 years. But as he has failed to survive 7 years, that 'potentially exempt transfer' is not exempt ; it forms part of his estate on death as if it had never been given away. And because it wasn't an exempt transfer of assets to his spouse (i.e. it was a transfer to his kids instead), it will use up £250k of his nil rate band.

    The rest of his assets could go to his wife on death, so no more of his nil rate band would be used up at the time of death. So only 250k of the (assume current rate of 325k) nil rate band was used up, and 75/325ths wasn't used up. So 23% of the nil rate band didn't get used.

    When wife dies a decade later, she has her standard nil rate band that year (say the allowable nil rate band is £350k that year) and her executors can fill out a form to get a transfer of another 23% of a standard nil rate band on top (350k x about 23% = about 80k). So the wife's estate is assessed against a total (350+80) £430k nil rate band.

    So in that particular situation, the wife ends up with a 430k nil rate band (as a result of the first spouse not surving 7 years after date of gift, and not having much nil rate band left over to transfer to her). Whereas if the gift had happened a full 7 years before first spouse's death, with nothing much else using up the first spouse's nil rate band, the wife could have received a much bigger proportion of the first spouse's nil rate band and had 700k total nil rate band available to deal with the settlement of her own estate.

    So from the above it would make sense to gift the assets as soon as possible to give yourself the best chance of surviving 7 years and the share transfer not using up any of your nil rate band. Obviously there are practical implications of handing over the shares to your kids in terms of them being able to vote the shares however they want. Or restrictions on transfer depending on the nature of the private company and any existing shareholder agreements etc.
    I hope I am posting to the correct forum.
    The 'cutting tax' forum is generally better for tax questions. Aegis's comments about BPR are something that could be quite pertinent, depending on the nature of the company.
    • BBJ
    • By BBJ 14th Sep 17, 8:16 PM
    • 3 Posts
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    BBJ
    • #5
    • 14th Sep 17, 8:16 PM
    • #5
    • 14th Sep 17, 8:16 PM
    Thank you all very much for this helpful advice. From what you've said and the reading material you pointed me to I think it makes sense for me to give away the shares .

    Basically my position is that I have a company which is still trading, but which I intend to wind up in a couple of years, taking advantage of entrepreneurs relief. At that point my thought was that I would give the proceeds to the children, but I would be a couple of years nearer my death at that point and so that gift would be more likely to be liable for IHT than if I were to offload the assets now. But if I give them the shares now, then when the company is wound up they will get the proceeds directly, and the gift of shares they got from me would be a couple of years further away from my death and therefore there would be less IHT to pay if any

    What I had actually wondered and which was the subject of my post - and as nobody has addressed this I assume it is a non-runner - is whether if I give away the shares and die within seven years the gift would be treated as coming jointly from myself and my wife, and assuming she survives for seven years from the date of the gift then IHT would not be payable (I was sort of drawing the analogy with IHT allowances being transferable between couples). Probably a bit far-fetched but that is what I wondered.
    • Keep pedalling
    • By Keep pedalling 14th Sep 17, 10:08 PM
    • 3,935 Posts
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    Keep pedalling
    • #6
    • 14th Sep 17, 10:08 PM
    • #6
    • 14th Sep 17, 10:08 PM
    Presumably you draw dividends from the company, which you will no longer be able to do when you give your shares away. Will that cause you any problems?
    • BBJ
    • By BBJ 15th Sep 17, 8:17 AM
    • 3 Posts
    • 0 Thanks
    BBJ
    • #7
    • 15th Sep 17, 8:17 AM
    • #7
    • 15th Sep 17, 8:17 AM
    Thanks for the thought, and that is something I will have to weigh. At present I am taking just the maximum tax free dividend, and given the reduction in that I don't think that is too much of an issue for me.
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