Difficulty understanding inheritance tax implications on gifted house deposits

I have so far read the basics about inheritance tax i.e £325,000 threshold and 7 year cooling off period. However I am struggling to understand how this works in practise in few scenarios.

1. Given I buy a house worth let's say £500,000 with gifted deposit of £200,000 from parents and the remaining on my savings and a mortgage. What sort of IHT rules will be applied to that £200,000 gift deposit? Will I have to pay IHT on that given the total value of house exceeds £325,000 which in my case is £500,000?

2. How about the same case as above but the value of the gift deposit is now let's say £400,000 as opposed to £200,000?

So I am wondering all of a sudden I will have to sell the house to pay off tax :(

3. Also another scenario is what happens I was gifted £50,000 in one year and I have spent it all on buying stuff or just on an expensive lifestyle and that 7 year period hasn't passed since I received that amount. Will I be in negative debt ? or given I have my own savings, will I have to use my own saving to pay off an inheritance tax ?

Thanks!
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  • enthusiasticsaver
    enthusiasticsaver Posts: 15,415
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    As I understand it If a parent gifts you £200k (regardless of what you do with it) and the estate is liable for IHT and that parent dies within 7 years then IHT is liable on a sliding scale depending on when the parent dies. What you use it for is irrelevant and the £325k applies to the parents estate not the asset you are buying. Consequently the tax is liable on the £200k.

    If you are liable for inheritance tax if your parents estate is worth more than £325k and they die within the 7 year period how you raise the tax is up to you.

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  • Eco_Miser
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    If you are liable for inheritance tax if your parents estate is worth more than £325k and they die within the 7 year period how you raise the tax is up to you.
    However you, the receiver of the gift, are only responsible for IHT if the donor's estate hasn't enough to pay it - which may or may not be the case if they've given you £200,000 or £400,000, depends how much they kept for themselves, and also what other gifts they've given.
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  • Linton
    Linton Posts: 17,045
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    All gifts made within 7 years not covered by allowances are included in the parents estate when calculating inheritance tax. Together they have an allowance of £650K so if this covers the estate value plus the extra due to gifts this is no tax to pay anyway. However if say they had in total given away £1.5M only leaving say £100K cash and a house worth £250K then there would be a problem:

    Total estate for IHT purposes £1.85M. Allowance £650K. 40% tax due on £1.2M=£480K. But there is only £350K available. Under such circumstances I think HMRC would only chase you if there was clear evidence that the estate had been impoverished with the objective of avoiding tax.
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    Assuming your parents own a house and it is worth £200 or more their joint nil rate band will rise to £850k on April 6th with the introduction of primary residence nil rate allowance which will rise to £1M over the next few years.

    The sensible think to do, providing your parents are in good health is to cover IHT on large gifts by taking term insurance to cover their unexpectedly early demise. This is what we have done, so in the event that both of us die within 7 years the insurance policy, which is written in trust, will pay out to our children the equivalent amount of IHT that will be paid out by our estate, on the gifts with have given them.

    Hopefully that policy will never pay out, but the £19 pounds a month it cost us for £200k of cover is pretty good value.
  • Keep_pedalling
    Keep_pedalling Posts: 16,368
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    As I understand it If a parent gifts you £200k (regardless of what you do with it) and the estate is liable for IHT and that parent dies within 7 years then IHT is liable on a sliding scale depending on when the parent dies. What you use it for is irrelevant and the £325k applies to the parents estate not the asset you are buying. Consequently the tax is liable on the £200k.

    If you are liable for inheritance tax if your parents estate is worth more than £325k and they die within the 7 year period how you raise the tax is up to you.

    The sliding scale only applies to gifts over the nil rate band, so not in this case. It is up only up to the OP to sort IHT if he is the executor, and unless his parents have given so much of their estate away that their is not enough left to pay IHT, a very rare occurrence, there is no comeback on the receivers of the gifts.
  • Thanks a lot for the replies guys. Now I see how the allowance doubles up.

    So the gift is considered part of the donor's estate until 7 years has passed and will be pro rated and taxed based on the the sliding scale for 7 years.

    I created this rough example leaving out all exceptions, Does this make any sense:

    Value of Donor's(for only 1 donor) estate: £400,000
    Value of the gift I got: £100,000(6 years passed putting me in the 8% tax bracket instead of 40%). Percentage of the gift from the full value of estate(gift + donor's house) = (100,000/(100,000 +400,000) ) x 100 = 20%.

    Given 325,000 is inheritance tax exempt. The total value of the gift I got which is tax exempt is,
    325,000 x 20% = £65,000.
    Hence my remaining amount is taxed at 8% which gives,
    (100,000 - 65,000) x 0.92 = £32,200

    Hence overall total value I am getting is £65,000 + £32,200 = £97,200.

    Now given these calculations are correct, does this mean I will have pay HMRC £100,000 - £97,200 = £2,800? And if so what if I am unable to find that amount without selling the house I already invested that amount into? Here I am assuming the remaining 80% of the estate is given to someone else.
  • Linton
    Linton Posts: 17,045
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    You dont pay it. It is simply part of the total inheritance tax bill and paid out of the estate before the remainder is distributed to the beneficiaries. - there is £400K available.
  • Pincher
    Pincher Posts: 6,552
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    It's not difficult, it's IMPOSSIBLE to understand.

    http://justwillsandlegalservices.co.uk/latest-news/the-7-year-rule-inheritance-tax-and-lifetime-gifts/

    The 7 Year Rule and the 14 Year Rule

    One element of the rules around Lifetime Gifts that many people are unaware of is that the seven year clock can be ‘reset’ with every gift (over your annual allowance) given before the seven year period has expired on previous gifts.

    For example, if Mr Smith gave Josie the £400,000 gift in 2010, but then gave a further gift (say £100,000) to Josie’s brother, Jim, in 2012, then the ‘clock’ on Josie’s gift is reset to the point that Jim receives his gift.

    As Jim’s gift was received less than three years before Mr Smith’s death, the tax on Josie’s gift now received no relief under the ‘Taper Relief’ rules.



    http://penguintaxplanning.co.uk/misconception-around-gifts-taper-relief/

    Most people are familiar with this seven year period but have you heard of the fourteen year rule that applies to gifts, if you do not survive the seven years?
    This rule is to discourage serial gifting!as a means of!reducing your estate. Let’s use an example; if you gifted £100,000 in July 2007 and £100,000 again in June 2014 and died before June 2021, the values of both gifts will be entered back in your estate and become subject to IHT.!Why? With the fourteen year rule in place, you have effectively reset the!seven year clock!on the first gift as the initial!seven year period was not complete.




    As far as I'm concerned, the only way to avoid IHT is to cryogenically freeze the person before declared dead, do the gifting, and then store them in California for seven years. After the seven years, thaw and issue the death certificate.
  • Linton wrote: »
    You dont pay it. It is simply part of the total inheritance tax bill and paid out of the estate before the remainder is distributed to the beneficiaries. - there is £400K available.

    I see. The payment of the tax is considered only from the Donor's side. I am guessing in the case the remaining value of the estate is not enough to cover total tax then any gift receivers might be chased up for tax dodging, if there is a suspicion of it.
    Pincher wrote: »
    It's not difficult, it's IMPOSSIBLE to understand.

    The 7 Year Rule and the 14 Year Rule

    One element of the rules around Lifetime Gifts that many people are unaware of is that the seven year clock can be ‘reset’ with every gift (over your annual allowance) given before the seven year period has expired on previous gifts.

    For example, if Mr Smith gave Josie the £400,000 gift in 2010, but then gave a further gift (say £100,000) to Josie’s brother, Jim, in 2012, then the ‘clock’ on Josie’s gift is reset to the point that Jim receives his gift.

    As Jim’s gift was received less than three years before Mr Smith’s death, the tax on Josie’s gift now received no relief under the ‘Taper Relief’ rules.

    Oh really. This is really over engineered! I doubt people know much about all these rules until the bill comes their way.
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