Inheritance Tax on gifts to grandchildren

Vibs

My mother in law recently passed away. About two years ago, before she knew she was sick, she bought all her grandchildren an expensive gift (jewellery worth about £1800 each), she has five grandchildren. She bought this out of her normal expenditure, income after tax has been paid and it did not affect her standard of living. They have not yet been given these gifts as they are all still little.

Do we need to declare these gifts for Inheritance Tax purposes ? Will they be exempt as gifts from 'normal' expenditure ? She will fall into the bracket where we have to pay IHT.

If they did fall under IHT, could we say they were still in her estate (they are not mentioned in her will) and then get them valued for probate, as with any jewellery it will be worth much less now than when she bought it in the shop ?

Thanks for any help, seems unfair what she bought as gifts for the children could end up costing my husband and his brother 40% of their value in tax.

CLAPTON

Vibs wrote: »

My mother in law recently passed away. About two years ago, before she knew she was sick, she bought all her grandchildren an expensive gift (jewellery worth about £1800 each), she has five grandchildren. She bought this out of her normal expenditure, income after tax has been paid and it did not affect her standard of living. They have not yet been given these gifts as they are all still little.

Do we need to declare these gifts for Inheritance Tax purposes ? Will they be exempt as gifts from 'normal' expenditure ? She will fall into the bracket where we have to pay IHT.

If they did fall under IHT, could we say they were still in her estate (they are not mentioned in her will) and then get them valued for probate, as with any jewellery it will be worth much less now than when she bought it in the shop ?

Thanks for any help, seems unfair what she bought as gifts for the children could end up costing my husband and his brother 40% of their value in tax.

how much exactly was the jewellery in total : 3,000 in gifts per annum is allowable for IHT purposes

Mojisola

Vibs wrote: »

About two years ago, before she knew she was sick, she bought all her grandchildren an expensive gift (jewellery worth about £1800 each), she has five grandchildren.

They have not yet been given these gifts as they are all still little.

If they did fall under IHT, could we say they were still in her estate (they are not mentioned in her will) and then get them valued for probate, as with any jewellery it will be worth much less now than when she bought it in the shop ?

She hasn't given the gifts so they are still part of her estate.

antrobus

Vibs wrote: »

.... She bought this out of her normal expenditure, ...

Gifts out of income are exempt from IHT.
http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm14231.htm

antrobus

Mojisola wrote: »

She hasn't given the gifts so they are still part of her estate.

The grandchildren haven't yet been given the gifts. That doesn't mean to say that grandma didn't give them to somebody else for safekeeping in the meantime. Which would be quite normal when giving things to people who are minors.

zygurat789

antrobus wrote: »

Gifts out of income are exempt from IHT.
http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm14231.htm

Rereading the op I think that Vibs had already read this and is seeking clarification that these gifts would pass the three tests.
1 Normal expenditure. It sounds as if Grandma died not long after having made these gifts so the argument is that this would have been her normal expenditure from the up until the time she died, unfortunately, she only had one year.
2 Made out of income. There must have been no reduction in savings.
3. Must leave the donor with enough money on which to live at her normal (whatever that may have been) standard.

xylophone

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

(they are not mentioned in her will)

You would not expect them to be? Each child (or more likely each child's parents) had been told that the gifts had been purchased - either grandma had kept them in order to pass on to the child at the right time or (more likely) had passed them to the parents.

Either way, she would hardly bequeath any object she no longer regarded as hers?

grey_gym_sock

zygurat789 wrote: »

Rereading the op I think that Vibs had already read this and is seeking clarification that these gifts would pass the three tests.
1 Normal expenditure. It sounds as if Grandma died not long after having made these gifts so the argument is that this would have been her normal expenditure from the up until the time she died, unfortunately, she only had one year.
2 Made out of income. There must have been no reduction in savings.
3. Must leave the donor with enough money on which to live at her normal (whatever that may have been) standard.

yes, i agree the key issue is whether it counts as normal expenditure.

if it doesn't count, there is a £3k exemption per tax year, and you can also use the previous year's exemption (if it hasn't already been used). so £9k of gifts could use £6k exemption, which means the IHT liability would only rise by 40% of the remaining £3k, i.e. £1200.

zygurat789

grey_gym_sock wrote: »

yes, i agree the key issue is whether it counts as normal expenditure.

if it doesn't count, there is a £3k exemption per tax year, and you can also use the previous year's exemption (if it hasn't already been used). so £9k of gifts could use £6k exemption, which means the IHT liability would only rise by 40% of the remaining £3k, i.e. £1200.

There may, of course, be no IHT, it is perfectly possible to have a high income but not much in the way iof assets. Annuities do have their good points.

Mojisola

If the items were still in your MIL's possession (ie, hadn't been handed over the parents of the children), I think it would be easier to treat them as part of the estate for valuation.

getmore4less

if part of the estates they are no longer gifts.

to be from income there would need to be evidence of regular gifting