How does the tax man know?

amandathepanda

I know that my dad who is 70 is only allowed to give me so much money per tax year without me paying tax on it. How much is it? How would the tax man know anyway, I have never filled a tax return in before, am I supposed to ?
Where could I go to get any advice on this?

mountainofdebt

I think it is more a case of your dad making gifts to you (I think the limit is £3K but don't quote me on that,lol!) and dying before a period of 7 years have passed. If he was to die before the 7 years, the gift would be subject to Interitance Tax on a sliding scale. (http://www.inlandrevenue.gov.uk/leaflets/iht2.pdf).

I don't think that you would be subject to tax on your dad's gift but I am willing to learn otherwise.

mountainofdebt

Sorry I should have said any gift over the limit would be subject to this sliding scale should your dad die within 7 years of making the gift

purplepatch

amandathepanda wrote:

IHow would the tax man know anyway, I have never filled a tax return in before, am I supposed to ?

Anyone know the answer to this part of the OP's question. I received a monetary gift 3 years ago and always wondered how the taxman would ever know.

Tim_L

As a general principle, the taxman knows because you tell him. The UK tax system is based on self declaration and self assessment (not necessarily involving filling in a form). It's never a good idea not to declare items that are taxable, as there are severe penalties and interest costs if the IR does happen to find out (which they can by a number of means).

However in this case you don't need to declare the gifts until actually filling out the Inland Revenue forms after your father's death (I hope later rather than sooner!). There's no income tax due on them at all, but you could run into some trouble if he had to go into residential care and the local council were being asked to pay - they might claim that your father had deliberately dissipated his estate to avoid making payments and they can apply very arbitrary rules. You need to check with Age Concern about the rules for this.

You do have to declare these gifts to the IR ultimately, but they may never be taxable depending on the value of your father's estate plus the value of the gifts less exemptions. The rules on exemptions are that a certain amount can be gifted in total out of an estate (I think £3000) tax free with some additional allowances for wedding presents and other special occasions - as noted there is a 7 year limitation for this. You can also use two consecutive years allowance against a single gift of double the £3000 provided there has been no other gift in the years you are claiming for. Any further gifts are added to the value of your father's estate for calculating inheritance tax, and you pay 40% on anything this adds up to above about 280K (not sure of the exact threshold).

So probably not a big problem at this stage. The best place for advice is either the Inland Revenue itself - they have some very helpful leaflets, or the CAB.

purplepatch

Cheers Tim

My parents took advice before making the gift - it was a substantial amount of money paid off on my mortgage. They told me at the time that they have some sort of policy in place to cover residential care (fairly expensive I believe) - not sure what it is, but apparently their assets will not be affected by care home fees.

We were already aware of the 7 year rule, but I was just curious how the IR would know about a payment made potentially six years previously. You mention forms that need to be filled in - these go back over 7 years do they? And what's to say that the person filling out the form would even know about them? I'm not suggesting dishonesty here, just ignorance

Jettycat

When someone dies the executors or personal representatives of that person (usually named in the will if there is one) have to fill in an Inland Revenue form to see if any Inheritance Tax is due and if so to calculate how much.

This form asks the executors or personal representatives to declare details of any gifts made in the previous seven years (and in some more complecated circumstances 14 years!). So they are responsible for completing this return correctly by going through all the financial records etc of the person who has died - and the Inland Revenue expect them to make all necessary enquiries of financial institutions, relatives and friends in order to complete the form correctly!

Poppy9

Unless you keep your money in a shoebox under the bed the tax man knows. All financial institutions have to by law give details of interest paid on accounts and they even collect the tax for the taxman. If you are a non tax payer you should complete an exemption form available from bank/BS. A copy of this form is submitted to the IR by the bank/BS.

The taxman will obviously have yearly details of your money held in savings. If they notice large increases/decreases in balances they may investigate to ensure there is no tax evasion. This is why rogue traders like to deal in cash. That being said if the taxman thinks you are declaring too little and have no money in the bank they can look at your lifestyle to assess whether you are avoiding tax.

purplepatch

Have to say that I'm certainly not looking to evade any tax, just wanted to know how they got the information when it isn't declared at the time of the gift.

Thanks for the replies, that makes it clear

Tim_L

Gifts or other transfers of value from an estate are completely invisible to the IR until they receive an Inheritance Tax form (IHT) which is either filled in by a solicitor or the executor of the estate when someone dies. In either case it's the responsibility of the executor to research whether any gifts have been made within the 7 years. If the estate value is nowhere near the IHT threshold it's very unlikely there'll be any sort of detailed examination, but if it is marginal they do look quite carefully at the figures, and will dig deeper if they suspect any sort of problem with the accounts.

It's very sensible indeed for anyone with excess assets and a possible IHT liability to start gifting them out of their estate and using these allowances. It does sound a bit morbid, but the only sure things are death and taxes, and the one thing that can really help soften the blow of the former is arranging your affairs so there are less of the latter!

Well worth getting hold of the IHT forms from the Inland Revenue so you know what the allowances are, and also working out the score as regards the linked issue care home provision (which Age Concern are good with). Care is particularly expensive if there is any mental impairment, in which case it's very difficult for even the best intentioned partners or children to care for their parents. And councils are notoriously difficult to persuade of their obligations - they will try every trick in the book to evade their actual responsibilities.

karenj

How does the taxman know about anyone's money affairs? I thought banks and financial institutions were supposed to keep customers information confidential? What about the DPA? Do the IR have powers that others don't to delve into someones personal financial records? Not that I'm trying to evade any tax due, but just curious as to how the IR know.