Money Gift But Now Gifter Seriously Ill - Tax Implications

chuckalicious_2

Over the last 4 years, my parents have been kind enough to give my wife and I quite a lot of money, in the form of a few gifts (£5k,£25k and £100k gifts plus a few smaller ones). The total sum has added up to roughly £166,000. They made a similar number of gifts to my brother and his wife. We all live in Scotland.

I had asked my parents at the time if we needed to do anything such as declare the gifts, pay any sort of tax on them etc and they said no - inheritance tax only kicks in if the person giving the money dies within 7 years of giving the money and the total value of the estate is over £325,000.

We have used this money to pay off a large part of our mortgage, so we don't have it sitting around anywhere.

However, my father has just been diagnosed with cancer and has made me the executor to the estate, so I have been reading up on what that entails, in the hopefully slim chance I'll need to carry out the task.

If the worst comes to the worst and he doesn't pull through, I wondered how the whole inheritance tax thing worked. I don't expect this to be the case, but I'd rather have an understanding of what needs to be done in case it does happen. I would rather understand my responsibilities now than at the time.

I understand how it works in general, but I the gifts are confusing me a little.

I understand that his whole estate would be valued, including all gifts made within 7 years. His estate will be worth more than the £325,000.

So does anyone know how these gifts would be viewed when they were gifted from BOTH my parents and only one of those parties dies?

Assuming the gifts were taken into account in whole and the whole estate is valued at more than the threshold, how is the tax worked out? Would I have to pay the tax for the gifts made to me and my brother do the same, or would it just be added up to one big tax bill which is paid out of the estate value and then whatever is left is split according to the will, again taking into account the gifts already made?

I know the above is complicated and may seem cold hearted - it's not and I desperately want him to pull through, however he made me executor knowing I would want to understand the process in as much detail as possible. I hope I won't need this knowledge due to the diagnosis, but I do need to know what might happen so I can plan for my family and their finances.

Thanks

SomersetSaver

Sorry to hear about your father.

I found this on the HMRC website about what counts as exempt - you need to look at the PET area.

Also, the "who pays" section on the site also details how/when any IHT needs to be paid.

Afraid I'm not sure how it would be viewed if seen as a gift from both parents - it may depend upon his will.

There is a phone number as well for further information
9.00 am to 5.00 pm Monday to Friday
Closed weekends and bank holidays 0845 302 0900 (or looks like 0115 974 3009 would work, as that's the number they give for calling from abroad)HTH - but hopefully someone with better information/knowledge comes along and helps.

chuckalicious_2

Thanks for the reply. Although your links don't seem to be working I think I've read most of what was on the HMRC site - I just didn't want to phone them as I expected the response of "call us if it happens" sort of thing. Maybe I should just give them a bell anyway.

bob_a_builder

untill its fixed, just click on the link and then in teh address bar of browser delete the leftmost part up to the beginning of the www

antrobus

chuckalicious wrote: »

Thanks for the reply. Although your links don't seem to be working ....

I think this is where they wanted you to go...

Who pays Inheritance Tax?
http://www.hmrc.gov.uk/inheritancetax/paying-iht/who-pays.htm

Atticus_1970

Chuckalicous I hope that you are not called upon to be an executor soon.

First off you have to work out whether the Estate will be subject to Inheritance Tax (IHT). Even though you believe the Estate will be above the £325,00 limit, it might still be exempt from IHT if your father left everything (or everything over and above the Inheritance Tax threshold) to your mother.

Once you have worked this out you can then choose a number of options. In most cases I assume the family can make some IHT planning decisions together.

I hope your mother is in good health (and not just for tax planning reasons). I believe the most tax efficient course of action as a family (given the few details you have given) are:

1. Re-visit your fathers will. Ensure that the will only provides to you and your brother up to the IHT limit (£325,000). Anything over and above that to go to your mother.
2. Re-calculate the value of your mother's estate taking into account your father's new will. If that is above the £325k limit she should make gifts to you and your brother to reduce the size of her estate.

For example - Mr and Mrs jointly own a house that is worth £650k and Mr has shares worth £50k. Their will leaves their estate to each other and then to their children in the event they both die together.

Mr dies before Mrs. His half interest in the house goes to her as does his shares. His estate is valued at £375k but because it all goes to his wife there is no IHT to pay. What a great result...well not really - Mrs is now sitting on an estate valued at £700k, when she dies and leaves it to her sons and so IHT kicks in.

Here's what Mr & Mrs could have done:

Mr changes his will so that his half interest in the house is left to his sons but the £50k of shares goes to his wife. Following his death there is no IHT issue -the IHT allowance of £325k was used up by his sons and the £50k that went to his wife is excempt.

Mrs now considers her position - she is now sitting on a potential estate of £375k. She could consider giving her sons the £50k shares and hopefully living for 7 years, or transfer her interest or part of her interest in the property to her sons for 'natural love and affection' again in the hope that she lives for 7 years.

There will still be Capital Gains Tax issues for the sons when they come to sell the house but there are several reliefs they can claim to reduce the CGT liability.

I hope that's understandable, and I'm sorry you're faced with such a situation.

John_Pierpoint

Atticus_1970 wrote: »

Mrs: now considers her position - she is now sitting on a potential estate of £375k. She could consider giving her sons the £50k shares and hopefully living for 7 years, or transfer her interest or part of her interest in the property to her sons for 'natural love and affection' again in the hope that she lives for 7 years.

There will still be Capital Gains Tax issues for the sons when they come to sell the house but there are several reliefs they can claim to reduce the CGT liability.

I hope that's understandable, and I'm sorry you're faced with such a situation.

For "mum" to be able to reduce the potential IHT liability on a previously owned asset, would the children not need to move in and live under the same roof ? Or "mum" would need to pay rent for her continued occupation of the property?

jennifernil

As the gifts were given by both your parents, I would think it would be assumed to be half from each of them. So Dad has gifted £166k.

Assuming no other gifts, were these made in such a way that he made use of his annual exemption of £3000? If nothing was gifted in a year, that £3000 can be carried forward 1 year to allow £6000 the following year.

Once you have ascertained that, you can deduct the allowed amounts. Whatever is left, should Dad not survive the 7 years, will reduce his IHT free £325k. If he leaves everything else to Mum, her IHT free amount when she dies will be £325k + Dad's reduced limit. So there will be no IHT to pay on the first death.

Mum could then work on giving away at least her exempt amounts. Her £166k of previous gifts can be reduced similarly to Dad's, and if she survives the 7 years the rest of the £166k will drop out of the picture. She can also make gifts out of income.

She can of course give away more than the exempt amounts and hope to survive the 7 years.

I am no expert, so I hope I have got all that correct! That is my understanding anyway.

00ec25

John_Pierpoint wrote: »

For "mum" to be able to reduce the potential IHT liability on a previously owned asset, would the children not need to move in and live under the same roof ? Or "mum" would need to pay rent for her continued occupation of the property?

agreed
that is a "gift with reservation" and this IHT loophole was closed years ago, it means the value of the 1/2 share would be included back in mother's estate on her death since she has continued to benefit form the asset by continuing to live there for free after she gave away her interest.
The only way to avoid that is for mother to pay son full market value rent in respect of her living in the son's asset.

John_Pierpoint

Or for the children to live in the property as their principal private residence?
(sort of caring for mum but that is not obligatory).

Previous thread on this subject here:

https://forums.moneysavingexpert.com/discussion/3395994

chuckalicious_2

Thank you for all the replies. This is spectacularly complicated!

I think I will re-read over the will and see what it says. It's not really the sort of thing I want to go to my dad and say "by the way, maybe we should change your will" - he ran an investments and pensions company for 15 years before retiring last year, so I assume he knows what he's doing - he just won't have seen this diagnosis coming...