Tax avoidance on compensation

MoneyMachine_2

Hi. I have a relative who has received £40,000 in compensation for loss of earnings and various other things. She currently receives income support, housing benefits etc and has recently picked up a part-time job (about 10 hours per week.)
She has been given permission to share this amount between family members as all were affected in various ways. I am trying to ascertain how much she is allowed to give away and best to avoid tax. The other consideration is how this affcts benefits etc. For example she is considering giving this to two grown up children - one of whom is marrying next year. Does this mean that she will no longer receive any benefits at all until she spends all or is their a point where she becomes entitled again?
The problem she foresees is that if she wil have to slowly drain this cash until it runs out and then receive benefits again - by the time she has spent this she will be over 65 and have no savings to fall back on - only state pension. One of her children is an expatriate so could she give an amount to that child and have him invest it in his name or hold it in high interest offshore account?
Not sure what the best options are here so any accountant/IFA types who have dealt with this situation before, all help appreciated - many thanks.
Feel free to PM if you wish to discuss in more detail.

canny_yorkshireman_2

got to be careful here as tax avoidence is perfectly legal as tax evasion is a criminal offence and no one would advise that route think the best way forward would be to seek expert advice as there are so many issues to contend with regarding state benifits and giving tax free gifts.
hth

LittleWoman_3

Gifts on marriage to own children are tax free up to £5,000. Other gifts should not exceed £3,000 per year.

I presume being in receipt of housing benefit mean shes renting. If she invest the money into property they will not be interested in it, (and therefore will not effect her benefits etc) unless it produces a good income. (Its the income, not the asset that will effect it!) I have a client who inherited a lot of property and when he told the benefits office about it, they told him it did not effect his claims until he started actually receiving income from the property!

As long as the amount she keeps is under £16,000 then she can still claim income support. I will mention that if one of her children needs help in purchasing a property (like supply the deposit) she can help them buy it. The money is not a loan, but she does it with the intention of owning a percentage of the property. As long as her name is not on the property (which if they have a mortgage it must not be!) then if they later sell the property and give her a percentage it will be 100% tax free. And best of all it is legal. To protect her rights, she must get a written agreement stating what proportion of the property is hers and get a solicitor to put a "caution" on the property to protect her rights, so they need her permission to sell.

LittleWoman_3

This is the web site for info on Income support

http://www.jobcentreplus.gov.uk/JCP/Customers/WorkingAgeBenefits/Incomesupport/index.html

MoneyMachine_2

thanks very much for the helpful replies so far,

It was agreed in the case that the compensation could be shared between family members who were affected - namely her 2 children but that the majority should go to her as she was most affected.
I looked at the benefits website and it says she can have £16000 in savings (increased from £8000 as of April 10 2006) if she has the maximum her benefits will will be reduced?
I am trying to ascertain the most 'efficient' amount for her to give to her children rather than keeping it all and have it dwindle away by the time she is a pensioner.

I will ask her to find out exactly how much is acceptable to give to her children and from that amount she should be able to gift an additional £3000 to each child. Also when one of her children marries next year she can gift £5000 but can she gift that before they marry or only on the day?

And so far as gifts are concerned what will happen if she gifts more than £3000? Is it illegal - will the recipient pay tax? If she gifts it to her child who doesnt live in the UK, does that make a difference???

I will recommend she seeks professional advice but the more information she has before she does that the better.

Thanks again for advice so far.

LittleWoman_3

She can actually gift any amount, but if she dies within 7 years, there may be a potential (unlikely) IHT liability! The £3,000 & £5,000 on marriage are the "no questions asked" amounts.

LittleWoman_3

I completely forgot to mention - if she did not give any money away last year, she can give double this year - i.e. £6,000 instead of £3,000 or £10,000 instead of £5,000. (This can only be done once).

For UK tax purposes it does not matter where they live, but it may be a problem in the country they are in. (I know in the US they have restrictions, but I think they are pretty generous).

MoneyMachine_2

Well thats certainly good news for her then - I wasnt aware of any 'carry over' facility so that takes care of £12000 with no IHT liability (£6000 to each child).
If she can gift any amount additionally, even with the IHT liability this will be helpful. The way I see it, if she divides the money evenly, each receives £13000 so she still qualifies for her benefits but will the DHSS take a hard line against her giving money away and falling into the benefits bracket??

LittleWoman_3

Its none of their business what she does with it, as long as she does not still have it and has access to it. If they don't know about it, why tell them (Some will say you must tell them everything - telling them is "bragging about it" rather not telling is "being economical with the truth"!)

Having said said that, you mentioned that she had been given permission to share this amount between family members as all were affected in various ways - she would be going against this permission not do do it and they don't have the right to make her or peanalise her for it.