Inheritance tax and cash gifts

ny153

I am helping my dad to investigate ways that we can reduce the inheritance tax that would be due in case of his death. One suggestion would be to make a large gift (not property) to me, and as long as he survives for more than 7 years, the gift would no longer be part of his estate. However, if my parents were to live for a long time (they are in their late 60s), they may need financial support, so they may need part of the gift back. Would this make it a gift with reservation of benefit? From what I have read, this only applies to property when the donor continues to live in the property rent free.

Thanks,

ny153

Amanita_2

Applies to cash gifts too.

To work for inheritance tax purposes it must be a true gift with the donor giving up all rights to the assets.

SeniorSam

ny153 wrote: »

I am helping my dad to investigate ways that we can reduce the inheritance tax that would be due in case of his death. One suggestion would be to make a large gift (not property) to me, and as long as he survives for more than 7 years, the gift would no longer be part of his estate. However, if my parents were to live for a long time (they are in their late 60s), they may need financial support, so they may need part of the gift back. Would this make it a gift with reservation of benefit? From what I have read, this only applies to property when the donor continues to live in the property rent free.

Thanks,

ny153

ny153.......... There are many ways that your parents may reduce the size of their estate to help mitigate inheritance tax if their esate is valued at more than £650,000 in this tax year, as they both have an allowance of £325,000.

Trust schemes can be set up either lending or gifting into Trust, but allowing the settlor/s to obtain a return if needed to support their lifestyle. Additionally many assets within a Trust, lent or gifted, can be accessed before Probate to help meet inheritance tax, so no delay in paying the tax and no loans to arrange.

The first thing you need to do is get your parents to find a good Independent Financial Adviser (IFA) that specialises in this particular field.

Do not use bank or building society advisers, this is a specialsed area and you need to establish that the adviser does know a lot about Trusts. Many say they do but only touch on the basics and that's not good enough.

If your parents have a good solicitor, one belonging to S.T.E.P. then he may be able to put you in touch with someone, but solicitors cannot give financial advice under Law Society rules.

Hope this helps

Sam

CLAPTON

ny153 wrote: »

I am helping my dad to investigate ways that we can reduce the inheritance tax that would be due in case of his death. One suggestion would be to make a large gift (not property) to me, and as long as he survives for more than 7 years, the gift would no longer be part of his estate. However, if my parents were to live for a long time (they are in their late 60s), they may need financial support, so they may need part of the gift back. Would this make it a gift with reservation of benefit? From what I have read, this only applies to property when the donor continues to live in the property rent free.

Thanks,

ny153

Lets get a bit realistic here

if your parents willing and freely give you a large gift now then it is tax free and if they live for 7 years then outside IHT (assuming anyway their estate is above 650,000 or 2 miliion is the conservatives get into power)


if in 20 years time you happen to freely give a gift to your parents I'm sure that would be alright too.

SeniorSam

ny153 wrote: »

I am helping my dad to investigate ways that we can reduce the inheritance tax that would be due in case of his death. One suggestion would be to make a large gift (not property) to me, and as long as he survives for more than 7 years, the gift would no longer be part of his estate. However, if my parents were to live for a long time (they are in their late 60s), they may need financial support, so they may need part of the gift back. Would this make it a gift with reservation of benefit? From what I have read, this only applies to property when the donor continues to live in the property rent free.

Thanks,

ny153

........... Clapton is right with that, but if this course is taken, your parents could consider the gift in two parts. Each of your parents can gift £3000 in each tax year withouit attracting any tax. If they have not been using this gifting allowance, then, they can also carry forward last years allowance, but only that year.

This means that between them, they could gift £6000 for last tax year, £6000 for this tax year and in the next tax year also gift another £6000 and all of this is immediatly out of their estate.

A further consideration may be gifting through the allowance of 'normal expenditure relief '. This works on the basis that if your parents have income above their normal expenditure, which has to be recorded reach year, they can set up a gift arrangement with the excess provided it is set up in a way that the gifts are intended to be made regularly and do not reduce their normal standard of living. Again this is imediatly outside the estate.

Hope this helps

Sam

James_Trimby

One way to add to SeniorSam's smaller suggestions that you could be loaned the monies interest free at the start and then your parents could write off the gift £3000 pa each (plus double in year one if previous year not utilised) This should be documented but could do oneself rather than a solicitor. The added advantage of this is that any growth in investments/deposits is not now growing their estate but is growing in yours. Also they can ask for the monies back should they need it (so apart from the amounts written off you need to keep this somewhere fairly safe rather than a holiday or two!)
The advantage of the small gift route is the 7 year rule does not apply AND they are less likely to be taken into account should nursing home fees be an issue later. (The council make take into account a large gift to relatives in calculating a claimants wealth) The disandvantage is that, if they live 7 years they may be kicking themselves not to have made it outright. If they might want some of it back in future should they be giving it away?? IHT planning, though often simple techniques, can be complex as one needs to know the full family and individual situations (wealth/income/requirements/accepted risk levels etc) so if monies are large speak to an IFA/accountant with the right IHT expertise. James

SeniorSam

James_Trimby wrote: »

One way to add to SeniorSam's smaller suggestions that you could be loaned the monies interest free at the start and then your parents could write off the gift £3000 pa each (plus double in year one if previous year not utilised) This should be documented but could do oneself rather than a solicitor. The added advantage of this is that any growth in investments/deposits is not now growing their estate but is growing in yours. Also they can ask for the monies back should they need it (so apart from the amounts written off you need to keep this somewhere fairly safe rather than a holiday or two!)
The advantage of the small gift route is the 7 year rule does not apply AND they are less likely to be taken into account should nursing home fees be an issue later. (The council make take into account a large gift to relatives in calculating a claimants wealth) The disandvantage is that, if they live 7 years they may be kicking themselves not to have made it outright. If they might want some of it back in future should they be giving it away?? IHT planning, though often simple techniques, can be complex as one needs to know the full family and individual situations (wealth/income/requirements/accepted risk levels etc) so if monies are large speak to an IFA/accountant with the right IHT expertise. James

James......... I do not believe that this is correct, other than for the first year when that would be a gift and recorded.

The annual gifting allowance needs to be done within each tax year and recorded as such.

Loaning a large amount and trying to set off the gifting allowance each subsequent tax year does not qualify. Check with the Capital Taxes ofice to be sure.

As long as a clear record of gifts is kept so that a paper trail is established, those gifts will never be cosidered by the DSS in respect of care costs. Normal and regular gifting alowances are exempt and most Trusts set up for gifts or Loan Trusts are also rarely looked at unless effected just prior to care being needed.

Sam

luiccia

SeniorSam wrote:

Loaning a large amount and trying to set off the gifting allowance each subsequent tax year does not qualify.

Do you know this for a fact then?

SeniorSam wrote:

The annual gifting allowance needs to be done within each tax year and recorded as such.

What James suggested fits the criteria perfectly.

you could be loaned the monies interest free at the start and then your parents could write off the gift £3000 pa each (plus double in year one if previous year not utilised) This should be documented but could do oneself rather than a solicitor. The added advantage of this is that any growth in investments/deposits is not now growing their estate but is growing in yours. Also they can ask for the monies back should they need it (so apart from the amounts written off you need to keep this somewhere fairly safe rather than a holiday or two!)

Think about it. There's nothing to stop someone giving 3k each year and the recipient handing it straight back over to reduce the original loan amount and documenting it.What's the difference?

SeniorSam

luiccia wrote: »

Do you know this for a fact then?

What James suggested fits the criteria perfectly.
Think about it. There's nothing to stop someone giving 3k each year and the recipient handing it straight back over to reduce the original loan amount and documenting it.What's the difference?

Luiccia .......... It could be rather complex as there would be a need to prove to the Capital Taxes office that the loan and the gift were to and from different accounts. The problem in using unorthodox methods is that the CTO can adopt the attitude following death, that it was not done correctly and at that time it's too late.

Also the loaned capital would still be part of the estate value, which is not the best type of planning.

A far better solution if the parents do have a large amount of capital that they can afford to gift now, would be to make a gift into Trust, so that after 7 years it is outside their estate.

However, there is a method of the settlor retaining the right to draw part of the original gift once a year for the rest of their lives............ even after the 7 years.

Parents and son are Trustees and can determine if money from that Trust investment is distributed elsewhere (say to the son if needed ?)

By making the gift in this way, the estae would reduce after 7 years, the growth is all in the Trust, but parents are assured that they could access money later on if required and do not let go of the Trust until ready to do so. The capital is also not accessible to the DSS.

Hope this helps

Sam

James_Trimby

HI SeniorSam I'm not a big fan myself of the loan arrangement as not really dramatic enough! BUT it does work the right off does need to be documented rather than an informal arrangement and definately not in advance. Best on larger sums of money as the interest/dividend/rental yield etc has to be big enough to make it worthwhile.

I have one client who has done this with about £400k. Used the monies to start a fairly sucessful property speculation business and pays mother a monthly capital amount back on the loan. As this arrangement is about 5-6 years old if mother had invested in an average interest account she might today be about £60-80k wealthier than she is know saving £24 - £32k in eventual IHT. They don't bother with a yearly write off as enough monies arround for gifts etc to rest of family. As this was a large % of her disposable wealth (cash) she could not afford to give it away as she needs to live off it until ready to sell other personal assets. The family does use a trust as well so as mentioned above all circumstances need to be considered and often it is a complex mix of ideas that work best for each family.

SeniorSam

James_Trimby wrote: »

HI SeniorSam I'm not a big fan myself of the loan arrangement as not really dramatic enough! BUT it does work the right off does need to be documented rather than an informal arrangement and definately not in advance. Best on larger sums of money as the interest/dividend/rental yield etc has to be big enough to make it worthwhile.

I have one client who has done this with about £400k. Used the monies to start a fairly sucessful property speculation business and pays mother a monthly capital amount back on the loan. As this arrangement is about 5-6 years old if mother had invested in an average interest account she might today be about £60-80k wealthier than she is know saving £24 - £32k in eventual IHT. They don't bother with a yearly write off as enough monies arround for gifts etc to rest of family. As this was a large % of her disposable wealth (cash) she could not afford to give it away as she needs to live off it until ready to sell other personal assets. The family does use a trust as well so as mentioned above all circumstances need to be considered and often it is a complex mix of ideas that work best for each family.

Hi James,

Rather than the 400k loan, had it been a gift into a certain type of Trust scheme, the annual withdrawal could have supported the income need, but all the growth would be in the Trust and in a year or so more it would all have been out of the estate with continued annual access of a maturing annual part for the rest of the settlors life.

It is a complex area and unless clients have a good IFA who is familiar with the various Trust schemes, then opportunities can be missed.

The Loan Trusts do not reduce the tax greatly or quickly, but they do make all the capital available before Probate and so help the family meet the tax bill and free up the estate quickly. It's also reassuring that the loan can be called back if needed by the lender.

Sam