Giving Away Large Amounts Of Money To Children

funkylady

[highlight] My parents want to give my husband and myself about £100,000 so that we can pay off the mortgages we have on two houses.
Can you confirm that if either of them die within 7 years we will be liable to pay inheritance tax on a sliding scale?
Could you also tell me that if my parents give us said amount of money but we treat it as a business transaction loan and pay them interest at the going rate would we still have to pay tax when one of them dies?

tyllwyd

Someone who knows more than me will probably be along in a moment, but my understanding is that a gift of £100,000 would be a "potentially exempt transfer".

(http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10010612)

If it was a loan and you paid interest, then it would still form part of their estate when they died, so I assume inheritance tax would be payable according to the total value of their estate - and I imagine they should pay income tax as appropriate on the interest received?

If you are planning to do this, I think you both need professional advice on any financial or legal implications.

CLAPTON

the best way at looking at inheritance tax to compare the situation if you are given the money now, compared to that if you get the money when your parents die.

inheritance tax is paid out of the estate rather than by you.

so an example : say your parents were worth 500,000 and they give you 100,000

if they die within 7 years then yes the HMRC will add the 400,000 remaining and the 100,000 and the estate will be charged inheritance tax on the 500k.

now if they don't give you any money now the estate will be worth 500,000 and the HMRC will charge IHT on the 500k.

so all other things being equal, there is no reason to delay giving you the money (and they both may not of course die within 7years) when the 100k will be outside IHT.

i see no benefit in them making you a loan as the loan amount will be part of their estate and so the HMRC will charge IHT on the estate which will include the loan amount so it will be about 500k.

Andy_L

Yes, assuming the value of their estate is over the IHT threshold
&
Yes, assuming the value of their estate is over the IHT threshold

CLAPTON

just to clarify one other matter.. IHT wouldn't become payable on the first death unless the first death leaves the money to you rather than the surviving partner.

funkylady

thank you all so much for your advice. It has certainly cleared up a few queries.

Their estate would certainly be well over the IHT threshold. My parents thought that it would be better to give us some money now so that we are able to utilise it instead of waiting until one of them dies.

And as you say they may both survive 7 years in which case the £100,000 will be exempt from IHT and out of their estate. :T

Barter

Isn't there some limit on the amount that they can give you in any one year without some sort of penalty? Sorry to be vague; it's just something in the back of my mind - hopefully someone can shed light on what I may be thinking of?

CLAPTON

no you can give away anything you like. its just that there may be IHT issues later. ( you may be thinking of the absolute IHT exemption of 3000 per annum)

also depending upon how your parents have written their wills, there may be no IHT payable until the second death.. i.e. if each leaves everything to the other person then only on the second death will any IHT become payable (inheritance to spouses are exempt)