Inheritance tax - parents offsetting my mortgage

Legacy_user

Hi all,

Bit of an unusual question this.

I believe parents are allowed to give their children upto £3000 per year in gifts that are exempt from inheritance tax.

I have an offset mortgage with Yorkshire Building Society, to which my parents have a linked 'offset plus' savings account (i.e the savings account is solely in their names, but they get 0% interest in return for offsetting my interest on the mortgage).

I was wondering if this would have any inheritance tax implications down the line? They are not actually gifting me any money, however I am saving over £3000 per year in interest and therefore getting a benefit from their capital (fantastic for me I know).

Any help appreciated.

John_Pierpoint

So they have devised a method of gifting you £3k of their now income-tax-free income?

Are we getting back towards the days when all interest payments were theoretically tax allowable?

Something tells me the tax man will be creating another 100 pages of legislation to outlaw this.

Mind you the capital of the parents is being taxed at 3 - 5% by inflation, in part caused by quantitative easing etc. on the demand side and lack of profitable investment on the supply side.

Let us hope the home is a "profitable" investment in (say) Southend on Sea:D

CLAPTON

I see no basis for any tax liability either now or future inheritance tax.

Your parents are giving you an interest free loan; no tax is payable.
In any event interest wouldn't be considered capital and so would not be subject to IHT.

John_Pierpoint

There is nothing to stop an elderly generation paying out regular income to anyone provided this does not eat into their capital. [But normally this is (income) tax paid income.]
The £3k a year can come out of capital in addition to the above.

getmore4less

teepee83 wrote: »

I believe parents are allowed to give their children upto £3000 per year in gifts that are exempt from inheritance tax.

Gifts over this only matter if the estate goes over the nill rate band(£650k for a couple) when those in the previous 7 years are added back.

I have an offset mortgage with Yorkshire Building Society, to which my parents have a linked 'offset plus' savings account (i.e the savings account is solely in their names, but they get 0% interest in return for offsetting my interest on the mortgage).

I was wondering if this would have any inheritance tax implications down the line? They are not actually gifting me any money, however I am saving over £3000 per year in interest and therefore getting a benefit from their capital (fantastic for me I know).

Any help appreciated.

The IHT implications are that they have not given the money away so it still counts in their estate.

A properly structured offset cannot be taxed because you are just borrowing less money.

System

Thanks for your replies.

This confirms what I had thought. When we set up this arrangement we were not even thinking about IHT, this is something my parents have started to think about as a few family members have passed away recently.

I did try ringing HMRC but they told me they could not comment on individual tax planning queries.

To be honest I would rather they spent some of the capital on themselves, so the £3000 per year gifting issue would not even be an issue but they are determined to pass on as much as they can to their children. I hope I can do the same for mine!

System

John_Pierpoint wrote: »

So they have devised a method of gifting you £3k of their now income-tax-free income?

Their income is still taxed as they are only semi-retired. From your other post this effectively means that they could pay us part of their income provided it does not affect their living standard?

John_Pierpoint wrote: »

Mind you the capital of the parents is being taxed at 3 - 5% by inflation, in part caused by quantitative easing etc. on the demand side and lack of profitable investment on the supply side.

Yes exactly - they are sacrificing growth of their capital in return for reduction of my interest burden. They do have plenty of other investments far outstripping inflation mind.

John_Pierpoint wrote: »

Let us hope the home is a "profitable" investment in (say) Southend on Sea:D

Afraid not, much further north than that! . However, I plan to live here for a very long time. Whether the house goes up or down in value, I will have to pay the mortgage.

warwicktiger

Are there two things being confused her?

1 A gift of £3.000
2 Linking (some of?) their savings to your offset mortgage to reduce your interest cost.

I suspect so.

1 Each parent can give you £3000 EACH pa so if you are single your parents can give you £6000 pa, if you are a couple each parent can give you £3000 EACH pa, total £12,000 pa. There would ne no liability to Inheritance tax.

2 By using their savings to offset your interest costs they could be seen to be giving you their lost savings interest, but has already been pointed out they are able to live without this so this gift would be seen as from their spare income. In addition, as has already been pointed out they can give you as much as they wish without any potential IHT liability if it can be show that this is coming from spare or un needed income.

Hope this helps.

grey_gym_sock

warwicktiger wrote: »

1 Each parent can give you £3000 EACH pa so if you are single your parents can give you £6000 pa, if you are a couple each parent can give you £3000 EACH pa, total £12,000 pa. There would ne no liability to Inheritance tax.

not quite right. it is £3000 per donor per tax year. so each parent can give £3000. but giving to multiple recipients doesn't increase the limit.

however, donors can also give up to £250 each to any number of recipients each year. but that only applies to recipients to whom they give no more than £250 in the year.

e.g. suppose this year i give £4000 to P, £1000 to Q, £200 to R, and £100 to S.

the gifts to R and S are within the £250 exemption.

the gifts to P and Q aren't. they total £5000, which exceeds the £3000 exemption by £2000. so there are potentially exempt transfers (PETs) of £2000.

if i die within 7 years of the PETs, £2000 of my IHT exemption has already been used.

System

grey_gym_sock wrote: »

not quite right. it is £3000 per donor per tax year. so each parent can give £3000. but giving to multiple recipients doesn't increase the limit.

however, donors can also give up to £250 each to any number of recipients each year. but that only applies to recipients to whom they give no more than £250 in the year.

e.g. suppose this year i give £4000 to P, £1000 to Q, £200 to R, and £100 to S.

the gifts to R and S are within the £250 exemption.

the gifts to P and Q aren't. they total £5000, which exceeds the £3000 exemption by £2000. so there are potentially exempt transfers (PETs) of £2000.

if i die within 7 years of the PETs, £2000 of my IHT exemption has already been used.

Thanks for this - I actually forgot it was £3000 per parent, so would have been under the limit anyway even if the 'lost interest' counted as a gift.

System

Thanks very much for all of your replies, it has set my parents mind at rest as much as mine,

In summary if I am reading right:

- each parent can gift £3000 each (i.e. max £6000 per year) - this is split between children not to each
- 'saved interest' that I benefit from my parents offset account is not included in this and has no IHT liability as effectively comes from spare income, rather than capital (i.e. they have given up interest/income on their savings rather than physically giving me capital)
- Parents could in theory give their children a proportion of their income with no IHT liability as has this come from income and not capital (e.g parents receive 2k pension per month, and pass on £500 per month to children)?

Am I making anything up there?