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  • FIRST POST
    • freemaestro
    • By freemaestro 19th Mar 17, 1:41 PM
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    freemaestro
    Difficulty understanding inheritance tax implications on gifted house deposits
    • #1
    • 19th Mar 17, 1:41 PM
    Difficulty understanding inheritance tax implications on gifted house deposits 19th Mar 17 at 1:41 PM
    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!
Page 1
    • enthusiasticsaver
    • By enthusiasticsaver 19th Mar 17, 1:46 PM
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    enthusiasticsaver
    • #2
    • 19th Mar 17, 1:46 PM
    • #2
    • 19th Mar 17, 1:46 PM
    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.
    4 weeks to go until early retirement in December . Debt free and mortgage free.

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    • Eco Miser
    • By Eco Miser 19th Mar 17, 2:01 PM
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    Eco Miser
    • #3
    • 19th Mar 17, 2:01 PM
    • #3
    • 19th Mar 17, 2:01 PM
    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.
    Originally posted by enthusiasticsaver
    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.
    Eco Miser
    Saving money for well over half a century
    • xylophone
    • By xylophone 19th Mar 17, 3:59 PM
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    xylophone
    • #4
    • 19th Mar 17, 3:59 PM
    • #4
    • 19th Mar 17, 3:59 PM
    7 year cooling off period.
    I think that you have got yourself into a tangle.

    http://moneytothemasses.com/tax-advice/inheritance-tax-iht-taper-relief-on-gifts-explained

    Your parents each have a nil rate band - any unused is transferable on the death of the first spouse to die.

    See also https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

    https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

    Below is archived but will be worth a look.


    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf
    • Linton
    • By Linton 19th Mar 17, 4:05 PM
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    Linton
    • #5
    • 19th Mar 17, 4:05 PM
    • #5
    • 19th Mar 17, 4:05 PM
    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
    • By Keep pedalling 19th Mar 17, 4:54 PM
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    Keep pedalling
    • #6
    • 19th Mar 17, 4:54 PM
    • #6
    • 19th Mar 17, 4:54 PM
    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
    • By Keep pedalling 19th Mar 17, 5:02 PM
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    Keep pedalling
    • #7
    • 19th Mar 17, 5:02 PM
    • #7
    • 19th Mar 17, 5:02 PM
    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.
    Originally posted by enthusiasticsaver
    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.
    • freemaestro
    • By freemaestro 19th Mar 17, 5:11 PM
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    freemaestro
    • #8
    • 19th Mar 17, 5:11 PM
    • #8
    • 19th Mar 17, 5:11 PM
    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
    • By Linton 19th Mar 17, 5:21 PM
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    Linton
    • #9
    • 19th Mar 17, 5:21 PM
    • #9
    • 19th Mar 17, 5:21 PM
    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
    • By Pincher 19th Mar 17, 5:36 PM
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    Pincher
    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.
    • freemaestro
    • By freemaestro 19th Mar 17, 7:23 PM
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    freemaestro
    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.
    Originally posted by Linton
    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.

    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.
    Originally posted by Pincher
    Oh really. This is really over engineered! I doubt people know much about all these rules until the bill comes their way.
    • Keep pedalling
    • By Keep pedalling 19th Mar 17, 7:57 PM
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    Keep pedalling
    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.
    Originally posted by Pincher
    Not really impossible if, like most people do, simply make potentially exempt gifts (PETs) the 14 year complication only comes in if you use chargeable lifetime transfers.

    https://www.thegazette.co.uk/all-notices/content/100654
    • Pincher
    • By Pincher 19th Mar 17, 10:34 PM
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    Pincher
    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.







    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.
    • bigadaj
    • By bigadaj 19th Mar 17, 11:21 PM
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    bigadaj
    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.







    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.
    Originally posted by Pincher
    Though showing a modicum of sense or knowledge of playing the system you would presumably be giving your mother some cash, which is then transferred as rent through bank accounts to demonstrate payment is being made.

    The amount circulating each year can then simply increase by inflation.
    • dales1
    • By dales1 19th Mar 17, 11:45 PM
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    dales1
    Pay the market rent each year.
    That's all.
    • Keep pedalling
    • By Keep pedalling 20th Mar 17, 2:08 AM
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    Keep pedalling
    http://webarchive.nationalarchives.gov.uk/20060213211319/inlandrevenue.gov.uk/leaflets/iht2.pdf


    What is a ‘gift with reservation of benefit’?

    A gift with reservation of benefit is one that is not fully given away so that either • the person getting the gift does so with conditions or restrictions attached, or • the person making the gift keeps back some benefit for themselves.
    Where this happens to gifts made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts.
    A gift may begin as a gift with reservation but some time later the reservation may cease.
    What



    Example

    If you give your house to your child but continue to live there rent free, that would be a gift with reservation. If after two years you start to pay a market rent for living in the house, the reservation ceases when you first pay the rent. The gift then becomes an outright gift at that point and the seven year period runs from the date the reservation ceased.
    Or a gift may start as an outright gift and then become a gift with reservation.


    Example

    If you give your house to your child and continue to live there but pay full market rent, there is no reservation. If over time you stop paying rent or the rent does not increase, so it is no longer market rent, a reservation will occur at the time the rent stops or ceases to be market rent.





    So, they can say I am not getting market rent just because the rent doesn't go up every year! If I increase the rent by £1 a year, they will just say that's not enough. Basically, they can and will deny the potentially exempt status if I don't throw my mother out.
    Originally posted by Pincher
    And quite rightly too. I would be more worried by the fact that she could be made homeless by things like you pre decreasing her or getting involved in a messy divorce. If your house is your only major asset, it is never a good idea to give it away, and if you do have other assets it is better to gift some of those away as they don't have the issue of retaining beneficial ownership that a home does.
    • Pincher
    • By Pincher 20th Mar 17, 9:02 AM
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    Pincher
    I'm just saying, they put so many traps in your way, that it's almost impossible to stay in your own home until you pass away.

    I am using the Rent a Room relief to receive rent, but I only just noticed that "market rent" means more than just that. Not increase it every year could put back the "with reservation" status!

    Common sense? How many people out there know to avoid all this?
    • Keep pedalling
    • By Keep pedalling 20th Mar 17, 9:45 AM
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    Keep pedalling
    I'm just saying, they put so many traps in your way, that it's almost impossible to stay in your own home until you pass away.

    I am using the Rent a Room relief to receive rent, but I only just noticed that "market rent" means more than just that. Not increase it every year could put back the "with reservation" status!

    Common sense? How many people out there know to avoid all this?
    Originally posted by Pincher
    Anyone giving away their home should take independent paid for advice, this after all is one of the biggest financial decisions anyone will ever take.

    From what you are saying you and a parent are living in a home formally owned by them, but they have gifted it to you. They still have use of the whole house not just a room, so the rent you are charging is going to be way below the market rate. This arrangement has also almost certainly had a detrimental effect on the primary residence nil rate band that is coming in on April 6th.

    You might find it worthwhile spending a few hundred on some professional advice.
    • Pincher
    • By Pincher 20th Mar 17, 10:52 AM
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    • 2,491 Thanks
    Pincher
    Anyone giving away their home should take independent paid for advice, this after all is one of the biggest financial decisions anyone will ever take.

    From what you are saying you and a parent are living in a home formally owned by them, but they have gifted it to you. They still have use of the whole house not just a room, so the rent you are charging is going to be way below the market rate. This arrangement has also almost certainly had a detrimental effect on the primary residence nil rate band that is coming in on April 6th.

    You might find it worthwhile spending a few hundred on some professional advice.
    Originally posted by Keep pedalling
    You are assuming my mother is the sole occupier.
    The rent just has to cover her room like a lodger.

    I paid ten thousand pounds in professional fees, for lawyers and accountants, when my father passed away, and they brought in a financial adviser to try to push me into a 10% Buy to Let mortgage. I got a 4.99% BTL instead.

    This fantasy of professionals don't mess up is laughable.
    The minimum effort on the last set of Wills was atrocious, I had to insist on some clauses from the previous Will to be re-instated. She no longer works at the firm.

    Who has been advised properly? That not only do you have to pay rent, you have to keep increasing it as well? I thought I did everything correctly, but there is always some small print they will trip you up with.
    Last edited by Pincher; 20-03-2017 at 11:02 AM.
    • Keep pedalling
    • By Keep pedalling 20th Mar 17, 11:09 AM
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    Keep pedalling
    You are assuming my mother is the sole occupier.
    The rent just has to cover her room like a lodger.

    I paid ten thousand pounds in professional fees, for lawyers and accountants, when my father passed away, and they brought in a financial adviser to try to push me into a 10% Buy to Let mortgage.

    This fantasy of professionals don't mess up is laughable.
    The minimum effort on the last set of Wills was atrocious, I had to insist on some clauses from the previous Will to be re-instated. She no longer works at the firm.
    Originally posted by Pincher
    I would not go along with that fantacy either, but it sounds like you were dealing with salesmen rather than a pro giving independent financial advice.

    I did rather assume that your mother was not sharing with anyone else, other than possibly yourself, but it seems to me that she has done rather badly out of a tax avoidance scheme that provides her with no benefits, a reduced standard of living and there is a chance that the scheme may backfire and leave you with a bigger rather than smaller tax bill.
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