How does the tax man know?

Poppy9

Banks, employers etc have to give this information to the tax man every year.

isasmurf

In the Taxes Management Act 1970 there is a section that banks and building societies are required to give to the Inland Revenue details on an individuals bank account if they are asked for it.

There is also similar legislation for ISAs, PEPs, TESSAs, Personal and Stakeholder Pensions, VCTs, and other financial products.

The DPA does not apply in this case becuase the information is being collected to ensure nobody is committing fraud or tax evasion. When you sign up for any financial product if you look in the small print, it will usually say you agree that we will provide the information to the relevant authorities or something along those lines.

molly_2-2

I've got a query about trying to deal with a bad decision about giving gifts retrospectively. My elderly father decided for various reasons to pass a large part of his savings - a pretty tidy sum - to me about 3 years ago. I'm keeping this money as a nest egg, and I've no intentions of spending it in my dad's lifetime. I hadn't the foggiest idea about IHT at the time he gave me the money - I thought it was just for the rich to worry about. It's only just dawned on me what the implications are, as I'm likely to face an IHT bill anyway on the basis of inheriting his house. I hope this isn't a stupid question, but if I give him the money back now will everything be OK? Will the taxman be interested in a gift from my dad's estate that I repaid with interest 3 years later? I was thinking that he could then just give me the permitted £3,000 a year if he wants to run down his savings more gradually. I suppose the general point here is whether you can undo a mistake like this fairly easily or whether you just have to live with it and pay the tax if necessary.

Patr100

Well the IIHT liability for such a gift would be a PET (potentially exempt transfer) under the seven year rule - The percentage IHT liability for the amount of that gift is reduced gradually over seven years - so provided your father survives seven years there should be no IHT due at least on the sum originally removed from his estate . If he dies within the seven years there is generally a proportionate amount of tax due. It decreases year by year until the seven years are up.
If you pay it back to him - it would still be considered part of his estate for tax purposes - along with the house value which we all have less control over.
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molly_2-2

Thanks very much for the info Patr100.

molly_2-2

Thanks, Paul Varjak. You've certainly given me food for thought, not least about the taper relief situation, which I hadn't understood.

As for the missing info, I didn't really think I should go into all the details of my situation as it wouldn't be very interesting for anyone else! But here goes. My father's main asset is his house, and based on current values it's likely to be worth a bit more than the current IHT threshold (£275,000), perhaps £280,000. I suppose all told his estate would be somewhere in the region of £320,000-£330,000. He's in his early 80s, in pretty good health for his age, widowed. He gave me £30,000. He's given no other gifts. My understanding is that if he needed to go into care, we could use the £30,000 to start paying for this - after that I suppose we'd need to sell the house to cover additional costs.

Re your suggestions. My natural inclination is to go for #1, not least because I don't want to worry him by raising the problem with him - he's even less clued up than I am about the IHT, issue and he easily gets worried by anything official like this. I don't know how #2 would work out, and I don't understand what a discounted gift trust is, but I'll go off and try to do some research now. Anyway, thanks very much again for the advice.

Rafter

Molly,

If you Dad can cope with the worry it is probably worth speaking to an accountant about how to avoid inheritance tax.

The rules have been tightened up considerably, but there are still ways of minimising it or avoiding it with proper planning.

Good luck.

R.

Patr100

Thank you Paul for clarfying that point about the taper.
My two brothers and I examined a number of options a couple of years ago re: our widowed mother. The main issue is that in London, even in the most modest areas , house prices have increased at least threefold from when she bought her place about 10 years ago.which is the largest part of the equation added to her savings .
We did almost go down the route of her gifting the house, becoming her landlords and her paying the market rate of rent to us thus also transferring her savings to us in the process faster than with the limited annual allowances - There would have been some capital gains tax implications if we later sold the house - but but the scheme untested and we decided against it. The IL will not comment on any possible schemes validity or efficacy in reducing liability.

Patr100

Paul_Varjak wrote:

patr100:

When looking at schemes to avoid IHT by gifting a property you really do need expert help. Also, with the introduction of the new pre-owned assets tax on April 6th many schemes (dating back to 1986) are going to fail!

We did take the advice of my brother's ex partner who is an accountant and specialises in personal taxation - however there was never any guarantee that the IL wouldn't take a different opinion as to any schemes when they look at the history. The gift and market rent option is sometimes cited as a theoretical choice but we could find no evidence that anyone had succesfully used the scheme.

Patr100

Paul_Varjak wrote:

I have heard similar things to you patr100 but, as it is not something I had to consider in relation to my mum I really do not know the answer. However, as I mentioned in my earlier post, it may now be trapped by the pre-owned assets tax that came into being on April 6th, 2005.

Looking at the IL site and the information on exclusions from the Pre owned Assets Act - as we were advised previously, my mother would have to have paid us as owners , the market rent, from her income or savings while occupying the house until her death.As well as a means to exceed the limits on individual annual cash gifts, This was also to prevent the gifting of the house to us being a Gift with Reservation but who knows what the IL judgement might be, come the reckoning.