Inheritance tax when paying off mortgage?

saveandspend

Hi, I'm new here - hopefully I'm posting this in the right place.

I'm hoping someone in the know will be kind enough to help me with a question.

My grandparents have offered to pay some money off my mortgage (I'm allowed unlimited overpayments). This would be above the £6k that they can give away without risk of inheritance tax.

In the event that they died within 7 years, would I still be required to pay IHT on the money they'd paid off the mortgage? I wondered if it might be exempt as it isn't really income to me, it's reducing my debt.

If it isn't exempt, I probably need to save up in case I have to pay a tax bill one day.

Thanks in advance.

John_Pierpoint

You don't have to pay IHT, grandparents' estates do.
This may cause resentment from your relatives/beneficiaries of the estate, depending on what the will says etc.
You have already worked out that they have an allowance of 3K per year so if they give away their capital at this rate then there will be no problem.
Presumably you have already worked out that each couple has a 624K (and rising) zero rate band for Inheritance tax purposes when they eventually pass away (ie 312K each transferable).

They are also allowed to spend/give away their income as long as this does not result on them living by spending their capital.

How big is the mortgage problem?

dzug1

saveandspend wrote: »

In the event that they died within 7 years, would I still be required to pay IHT on the money they'd paid off the mortgage? I wondered if it might be exempt as it isn't really income to me, it's reducing my debt.


Thanks in advance.

You are right - it is not income to you, but a capital payment.

So yes, unless it falls under an allowance/exemption it will eventually come into the IHT field.

CLAPTON

If their estate is above £624,000 and they die then their estate will have to pay IHT on the excess.
If they give month away now and both die within 7 years then the gifted money is counted as part of their estate and so the total IHT will be the same as if they have never given the money away.

There is a general exemption of 3k each per year that can be given away and not form part of their estate.
If they gave nothing away last year, they can each carried forward 3k from 2007-8 .. so they can each give you 6k now (i.e. before 5 april 2009 ) without any IHT considerations and of course they can give you another 3k each after 6th April.... so in total you could be given 18k without it potentially being liable for IHT.

On the other hand, if they are likely to live for a year or so and you think the Conservatives will win the next election, then they have promised to raise the IHT limit for couples to £2m.

RayWolfe

CLAPTON wrote: »

On the other hand, if they are likely to live for a year or so and you think the Conservatives will win the next election, then they have promised to raise the IHT limit for couples to £2m.

I doubt this will be one of their first priorities. At least, I hope not!

John_Pierpoint

CLAPTON wrote: »

On the other hand, if they are likely to live for a year or so and you think the Conservatives will win the next election, then they have promised to raise the IHT limit for couples to £2m.

A day is a long time in politics, don't hold your breath, the Tories have just changed their minds.:eek:
[Quite right too this country is already far too deep into deficit financing.]

saveandspend are you thinking of getting married? (Tying the knot/jumping the broomstick?)
There is an extra 2.5K possibility for a grandchild who is getting hitched..

CLAPTON

John_Pierpoint wrote: »

A day is a long time in politics, don't hold your breath, the Tories have just changed their minds.:eek:
[Quite right too this country is already far too deep into deficit financing.]

saveandspend are you thinking of getting married? (Tying the knot/jumping the broomstick?)
There is an extra 2.5K possibility for a grandchild who is getting hitched..

you are indeed right..a day is along time in politics..infact a couple of hours is too!

RayWolfe

RayWolfe wrote: »

I doubt this will be one of their first priorities. At least, I hope not!

Me and Ken ... like fingers in the same glove!

saveandspend

Thanks for your info, useful stuff. I'm not about to get married so that option's out sadly!

Regarding them being allowed to give away income if it does not make them live off their capital - their capital is their house I think. So if they are living off their pension and giving away savings, does this come under IHT?

John_Pierpoint

Savings are capital.
IHT is a capital transfer tax at the time of death.
Is this house in a wickedly expensive part of the country (Chelsea) ?
Most pensioners can live reasonably comfortably in a house + savings adding up to 624K.
Or at least they could before the interest rates were slashed in line with a base rate of 1/2%.

RayWolfe

Their savings are part of their capital. Therefor, by and large, if their savings reduce because they are giving money away, their capital is reducing. This aspect of IHT planning only applies if people can give away money from income and that does not cause a reduction in their standard of living.
Don't forget What CLAPTON said about IHT thresholds.