Tax on gifts before 7 yr period

dontknowwhatimdoing

Hello again! I know I am the executor (with my husband) and Trustee of the will. She did not want anyone else. Knew that 20 years ago when it was made. Have opened it this morning - I am sole inheritor. Life will not be worth living when he finds out. Feel sick. I know why this has happened but it is not going to help me when I tell him.

localhero

There is a lot of confusion surrounding gifts and IHT, and so I will provide a couple of examples.

Single person, estate worth 600k gives son 100k this tax year and then dies this tax year. Assuming no other gifts were made this tax year or last year, then:

3k annual gift allowance for 2009-10 disregarded for IHT, plus
3k annual gift allowance for 2008-09 also disregarded (you can only go back to last year)

94k is the potentially exempt transfer (PET)

This year's nil rate band = 325k
the gift (PET) of 94k uses some of the nil rate band
remaining nil rate band = 231k
Estate after gift = 500k
231k @ 0%
269k @ 40% = 107,600 to be paid by the estate

Same facts, but this time the gift is from father who is married (who leaves the rest of his estate to his wife in his Will)

PET = 94k
nil rate band used: 94/325 = 28.9%
wife then dies in May 2010 (nil rate band will be 350k)
she can uplift her NRB by 71.1% = 598,850 (note it is the later, higher NRB)
taxable estate = 500k
IHT due nil.

So in short, gifts always use up the nil rate band allowance first before IHT comes into play, and where the value of the gifts are less than the nil rate band, the liability will always fall on to the estate. But in the case of gifts that exceed the value of the nil rate band, taper relief comes into play and the liability for the IHT could change. Eg:

Single person estate worth 900k
buys his son a house for 406k this tax year, then dies this tax year.

Value of gift = 400k (uses up two year's 3k)
nil rate band of 325k is all used up by the gift
75k of the gift is taxed at 40% = 30k
the rest of his estate of 500k is also taxed at 40% = 200k

Now unless his Will says otherwise, his son will have to pay the IHT of 30k on the gift. This is where taper relief may come into play. Unfortunately as the father survived less than 3 years from making the gift no taper relief is available. There is a sliding scale where the tax is reduced according to how long the person making the gift survives. After 7 years that liability is reduced to nil.

Hope those examples help.

Eyesparky

Good to hear that the executor status is clear at least. It seems like a difficult situation with concerns to sole inheritance but try not to worry too much. If you thought the situation was unfair, I think you could choose to have a deed of variation to include your brother in the estate. To be honest you would need much better legal advise than I could offer if you decided to look at this route. Ultimately though it was the wish of your mother that you were the beneficiary and you shouldn't put too much pressure on yourself over this. I hope all goes well.

Johnhowell

Do not think too badly, your brother did get the gifts over the years - you did not!

Once the probate is completed you can do what ever you wish with the money - it will be yours. You could just give what you consider is fair to your brother. But your mother had already considered her son in the Will - that is: nothing.

Best wishes,
John

dontknowwhatimdoing

Thank you all so much for your support - I could cry at the moment. I am going to contact him (lives in another country) in order to tell him the bad news. I am simply terrified of his reaction.
There is further evidence as to why mum did this but I had better not divulge except to say that she never told me and now my heart is breaking. And the anger is setting in.
I am so grateful to you all and it is lovely to know there are people out there who are so nice. Thank you.
XXXXX

dontknowwhatimdoing

Well the phonecall happened at 2am this morning - quiet, shocked acceptance is harder to deal with than verbal abuse.
Finally fell asleep on a very damp pillow as the dawn chorus was starting. I feel so bad, even though none of this is my fault.
So will start the probate form Friday.
Thank you everyone of you who replied - whilst my husband and children
are so loving and supportive, I still felt lonely until I discovered this site.
I am truly grateful for all the advice given. :lovethoug
(and yes - he will get a cash sum from me, only he does not know this yet)

Eyesparky

It is a difficult situation and I am glad you managed to come through OK. I would definitely seek advice with concerns to the cash sum you are talking about from someone a little more knowledgeable than me. I am not sure but a deed of variation to the will to allow the estate to settle a sum on your brother may prove better than a cash sum given by you after the estate is settled for tax planning purposes.

John_Pierpoint

-and yes - he will get a cash sum from me, only he does not know this yet.

It is a funny old world; remember expectation is a more powerful emotion than gratitude.

Don't forget that sums over 6K to get started, and then 3K a year. have to be explained to the authorities, should you die within 7 years.In the final analysis, I think it is integrity that counts.

Good luck with the forms, my return, as some IHT is payable, involved over 60 sides of A4.

Eyesparky

John_Pierpoint wrote: »

Good luck with the forms, my return, as some IHT is payable, involved over 60 sides of A4.

They love to make life easy don't they .

dontknowwhatimdoing

Gosh - I thought I had it all worked out.
I was thinking more in the line of 15-20K. That would ease my mind, and allow me then to sever all links.
Surely I am allowed, as his sibling, to give him a lump sum from the estate of our mother without incurring the 7 year business?
Only I would not like to assume I will last another 7 years at this rate. 7 days if I am lucky.
I am not prepared to give it in yearly amounts because of the need to cease contact. If the money went to another country, would the tax law still be enforced?
Gone off my supper now. Wish I was in charge of all taxation - I would make it so simple! :rotfl: