Gifted deposit and tax.

Morn

Hi,

My partner and I are about to purchase a property with a gifted deposit.

The total gifted amount is just over £40k with one side of the family paying £35k and the other making up the difference.

We are trying to understand the tax liability on this in terms of capital gains tax and inheritance tax (and other if applicable).

As I understand it, the GCT issue exists if the property is a second home and as such will not influence this gift. Am I correct on this?

With inheritance tax I am less sure, I understand the seven year rule but what are the main implications here??

Thanks in advance...

seven-day-weekend

I'm no expert, what I say is based upon my own knowledge, having gifted a deposit to my son in 2012.

I think you are right in the CGT issue, it only applies to a home which is not your main home, when it is sold.

As regards IHT, I don't know, but don't think it is applicable if the donor lives longer than seven years after giving it. It may not apply at all.

I'm sure someone else will be along soon who will know more.

kingstreet

A gift may be subject to IHT if the donor dies leaving an estate of more than £325k including the gift.

A gift may be a potentially exempt transfer, PET, and subject to IHT taper relief with the amount of tax falling over the seven years from gift and payable only on death during the seven years.

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

CLAPTON

I assume that the 40k is a cash gift?

As capital gains tax is about the increase (gain) of an asset, there are no cgt implications of a cash gift.


As far as IHT is concerned then the 7 year rule may apply
i.e. if the donor dies within 7 years then the amount of the gift is added back into then value of their estate for IHT purposes, however it would be for the estate to settle any IHT arising.
Current IHT allowance is 325,000 for one person but can be 650,000 for the second death of a couple depending upon circumstances.


Without knowing the full details if impossible to be definite but unless the donors are very old then it shouldn't really be a concern.

CLAPTON

kingstreet wrote: »

A gift may be subject to IHT if the donor dies leaving an estate of more than £325k including the gift.

A gift may be a potentially exempt transfer, PET, and subject to IHT taper relief with the amount of tax falling over the seven years from gift and payable only on death during the seven years.

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

taper relief is a little complicated but only applies to gift totals above the IHT limit i.e. above 325,00 and so does not apply here.

Morn

kingstreet wrote: »

A gift may be subject to IHT if the donor dies leaving an estate of more than £325k including the gift.

A gift may be a potentially exempt transfer, PET, and subject to IHT taper relief with the amount of tax falling over the seven years from gift and payable only on death during the seven years.

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm

Ok so to make sure I get this straight in my head - the gift is a) CGT exempt as its a primary property, b) It is Inheritance tax exempt if the person making the gift lives for more than 7 years with the taxable rate tapering off up to that point.

Either way the tax burden is essentially on us as the receiver rather than the gift giver should it come down to it.

Is that it in a nutshell??

-- Posted prior to seeing Claptons response --

CLAPTON

Morn wrote: »

Ok so to make sure I get this straight in my head - the gift is a) CGT exempt as its a primary property, b) It is Inheritance tax exempt if the person making the gift lives for more than 7 years with the taxable rate tapering off up to that point.

Either way the tax burden is essentially on us as the receiver rather than the gift giver should it come down to it.

Is that it in a nutshell??

Reread my post above.

But, No this is TOTALLY wrong.

There CANNOT be cgt on a cash gift.

CGT only arising because an asset has increased in price and is sold.

Cash does NOT increase in price.

Now if you use you money to buy a ming vase and it increases in price and you sell it then there may be a cgt liability. It has NOTHING to do with the 40k gift and everything to do with the increase in price of the ming vase.

Now, property that you own and live in as your main residence is exempt from cgt when you sell. Again this has NOTHING to do with how you financed the property and NOTHING to do with the 40k gift.

I have explained how IHT works above.

Morn

CLAPTON wrote: »

I assume that the 40k is a cash gift?

As capital gains tax is about the increase (gain) of an asset, there are no cgt implications of a cash gift.


As far as IHT is concerned then the 7 year rule may apply
i.e. if the donor dies within 7 years then the amount of the gift is added back into then value of their estate for IHT purposes, however it would be for the estate to settle any IHT arising.
Current IHT allowance is 325,000 for one person but can be 650,000 for the second death of a couple depending upon circumstances.


Without knowing the full details if impossible to be definite but unless the donors are very old then it shouldn't really be a concern.

Thanks Clapton,

I posted my last one before I saw your comments.

Yes the gifts are cash, and the main givers are married and in their late 60s early 70s whereas the giver of the lower amount is divorced and in her mid 60s.

Stupid question now - for the married couple will it make a difference if both or just one person signs the letter gifting the money. In a nutshell will it change the way the estate is managed in the unfortunate event of one of them passing away within 7 years?

CLAPTON

Morn wrote: »

Thanks Clapton,

I posted my last one before I saw your comments.

Yes the gifts are cash, and the main givers are married and in their late 60s early 70s whereas the giver of the lower amount is divorced and in her mid 60s.

Stupid question now - for the married couple will it make a difference if both or just one person signs the letter gifting the money. In a nutshell will it change the way the estate is managed in the unfortunate event of one of them passing away within 7 years?

Firstly, remember that it is the ESTATE of the deceased that pays the IHT (if applicable) and not you (except in truely unusually circumstances).

No stupid questions; it's a complicated situation.

Whether a married person has a IHT liability on first death depends very much upon the full circumstances; is there a will, what does it say, is the married couples property in their joint names as Joint Tenants. etc etc?
For a great many people, if everything is left to the surviving spouse then there is no IHT liability.

I'm not entirely sure about the effects of who signs the piece of paper about the gift, but would assume if only one signed then it would be deemed to be their gift and not a joint one.

Morn

Thank you to everyone for their advice on this, complicated stuff this inheritance tax malarkey.

@Clapton - Thanks for simplifying it down. I can cope with most tax/financial topics but inheritance tax seems to have its own extra complicated rule book!! :undecided

Cheers

kidmugsy

Morn wrote: »

Yes the gifts are cash, and the main givers are married and in their late 60s early 70s whereas the giver of the lower amount is divorced and in her mid 60s.

Stupid question now - for the married couple will it make a difference if both or just one person signs the letter gifting the money.

1) The £5k gift: if the giver hasn't used her gift exemption (£3k per annum) this year or last, then the gift, being less than £6k, is exempt from IHT. I suggest that you ask her to write you a letter confirming that it's a gift and even stating that it's within her allowance.
2) The £25k gift - same rules per gifter. So ask them to write separate letters each confirming a gift of £12500 and (if true) explaining why £6k of it falls within the allowance. Note that if it's convenient, they could wait until April 6 and there would be another £3k per head available exempt from IHT so that they could each gift £9.5k now - of which £6k would be exempt - and the last £3k in April. Note that the amount that will be potentially exposed to IHT is now down to £3.5k x 2 = £7k. Easy-peasy.