Inheritance tax questions

AlanF

Hi!

I wonder if anyone can clarify some of the sections on the MSE web site (so much easier to read and understand than the HMRC web site!!).

In essence my father who is in his 70s, and hopefully going to live longer than 7 years, has given myself and my sister (his only children) a sum of £1500 each per year for many years, believing this to be except from IHT should he die within 7 years (i.e. a total of £3K per year). However, an accountant friend of his (golf course chat, typical....) has said it that the £3K is subject to a maximum of £250 per recipient per year, and therefore that if he dies within 7 years my sister and I will end up owing tax on these past payments. The MSE site says that the £250 per person gifts DON'T COUNT TOWARDS THE ANNUAL GIFT LIMIT, but the example then quoted has slightly confused me because (by coincidence?) the total that the 12 grandchildren receive (12 x £250) equates to £3K, which is the annual limit. So could that example be expanded further to suggest that if the person had two children and 20 grandchildren then every year he could give £3K between the two children (the annual exemption), AND £250 each to all 20 grandchildren? Or £1500 to each of the two children per year to use the annual exemption, and then a further £250 to each of those same two children because the original £1500 each was exempt from IHT, and he can still make gift of £250 per person?

Secondly, my father is a higher rate taxpayer thanks to his generous pensions and investments. He therefore can very clearly afford to give us the £1500 each annually out of his INCOME - he enjoys a good lifestyle with lots of foreign holidays, and still gives my sister and I £1500 each year without dipping into his savings, so therefore would this be excempt from IHT anyway, as it is from income and not from assets? If so, how can this be proved in the event of HMRC challenging it, and could he (within reason) give more than £1500 to each of us if it is within his income limits? (I presume annual donations count as 'regular' gifts from income?)

Thirdly, I am getting married next year, and my father has very generously offered me £5K towards the wedding costs, as his golfing accountant friend has told him he can do this within the allowance. However, at is phrased on MSE it appears that this gift 'on condition of marriage' is not necessarily intended to pay for the wedding, it is a conditional gift, more in line with a dowry in other cultures! So my question here is can that money be used to physically pay for the wedding (or a chunk of it), or can he choose to contribute whatever he wants to our wedding (even if more than £5K) without HMRC having a claim? It is, after all, a longstanding tradition that parents pay for weddings (OK, admittedly usually the bride's parents, but hers are both dead), and I've never heard of HMRC coming after people for a refund of wedding costs if the bride or groom's parents die within 7 years of them getting married. Most weddings cost an awful lot more than £5K.

I would add that my father has in the past sought extensive specialist legal advice about reducing risks to IHT, but became rather despondent about the complexity and costs of that advice - he drew out a complex Trust to protect his and mum's joint assets, but by the time mum died the rules had changed and her IHT allowance now has automatically passed to him anyway! If we can get satisfactory reassurance from experts on this site then we'd be happy to go ahead and not spend lots of money on legal advice to confirm what we already believe to be the case!


Thanks in anticipation of support!

AlanF

purdyoaten

AlanF wrote: »

Hi!

. However, an accountant friend of his (golf course chat, typical....) has said it that the £3K is subject to a maximum of £250 per recipient per year - (complete and utter garbage), and therefore that if he dies within 7 years my sister and I will end up owing tax on these past payments (more garbage). The MSE site says that the £250 per person gifts DON'T COUNT TOWARDS THE ANNUAL GIFT LIMIT (correct unless the person receiving has already received £3000), but the example then quoted has slightly confused me because (by coincidence?) the total that the 12 grandchildren receive (12 x £250) equates to £3K, which is the annual limit. So could that example be expanded further to suggest that if the person had two children and 20 grandchildren then every year he could give £3K between the two children (the annual exemption), AND £250 each to all 20 grandchildren?( Yes - that is fine) Or £1500 to each of the two children per year to use the annual exemption, and then a further £250 to each of those same two children because the original £1500 each was exempt from IHT (No - can't do this ), and he can still make gift of £250 per person?

Secondly, my father is a higher rate taxpayer thanks to his generous pensions and investments. He therefore can very clearly afford to give us the £1500 each annually out of his INCOME - he enjoys a good lifestyle with lots of foreign holidays, and still gives my sister and I £1500 each year without dipping into his savings, so therefore would this be excempt from IHT anyway, as it is from income and not from assets? If so, how can this be proved in the event of HMRC challenging it, and could he (within reason) give more than £1500 to each of us if it is within his income limits? (I presume annual donations count as 'regular' gifts from income?)

Thirdly, I am getting married next year, and my father has very generously offered me £5K towards the wedding costs, as his golfing accountant friend has told him he can do this within the allowance. However, at is phrased on MSE it appears that this gift 'on condition of marriage' is not necessarily intended to pay for the wedding, it is a conditional gift, more in line with a dowry in other cultures! So my question here is can that money be used to physically pay for the wedding (or a chunk of it), or can he choose to contribute whatever he wants to our wedding (even if more than £5K) without HMRC having a claim? It is, after all, a longstanding tradition that parents pay for weddings (OK, admittedly usually the bride's parents, but hers are both dead), and I've never heard of HMRC coming after people for a refund of wedding costs if the bride or groom's parents die within 7 years of them getting married. Most weddings cost an awful lot more than £5K.

I would add that my father has in the past sought extensive specialist legal advice about reducing risks to IHT, but became rather despondent about the complexity and costs of that advice - he drew out a complex Trust to protect his and mum's joint assets, but by the time mum died the rules had changed and her IHT allowance now has automatically passed to him anyway! If we can get satisfactory reassurance from experts on this site then we'd be happy to go ahead and not spend lots of money on legal advice to confirm what we already believe to be the case!


Thanks in anticipation of support!

AlanF

See comments in red - I think that the accountant is not a tax specialist!.

Much of the third paragraph is covered here:

http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm14231.htm

One can give away as much as one likes in regular gifts so long as it does not affect the donor's standard of living without those amounts forming part of the estate.

Read the section below headed:

Small gifts

and

Regular gifts or payments that are part of your normal expenditure

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

getmore4less

A simple measure for regular gifts from income is that the relevent asset pile is not getting smaller(ie using up capital).


The other simple way to reduce any IHT liability is get spending/giving away.

If there is a healthy pension and a double millrate band(£650k) thats probably a target(Maybe some more for care) that will still result in a very comfortable life and there is nothing tostop family helping out if needed if you accidently give away too much.

The other thing is gifting rarely makes the IHT situation worse although if the numbers are big in a 7 year period there are optimisations to look at.

le_loup

jenfa wrote: »

Having paid over £45000 in inheritance tax 8 years ago

No you didn't, you received a very large sum of money after the estate paid some tax. I hope you were pleased with your unearned windfall.

jenfa

le_loup wrote: »

No you didn't, you received a very large sum of money after the estate paid some tax. I hope you were pleased with your unearned windfall.

That is a disgusting thing to say of course not
1. because my father died at an incredibly young age which no child should suffer and be orphaned; yes and inheritance tax is paid even if you are only 1 year old, I would give every penny and plenty more to have him in my life again.

2. At that point inheritance tax thresholds were much lower and just selling his house which he worked hard, saved for meant he went over the threshold because he was sensible enough to have life insurance to pay his mortgage never anticipating that he would need it.

Don't judge someone until you have walked in their shoes, and you know the full facts.

le_loup

No judgement. Just pointing out that you didn't pay any inheritance tax.

TheCyclingProgrammer

jenfa wrote: »

Don't judge someone until you have walked in their shoes, and you know the full facts.

I think you're over-reacting...le loup was simply pointing out that inheritance tax is a tax on the estate, not the beneficiaries. You would have had no personal liability to pay IHT, the estate would have and you were entitled to your share of whatever was left.

kidmugsy

In an accounting sense, the IHT fell on the estate. In the more profound matter of economic incidence, it fell on the inheritors.

isildur2

Hi

Would this be a possible way to avoid inheritance tax on cash deposits held?

Mr X owns property worth £325,000 and has cash at bank of £40,000. If he died and left his estate to his children, they would have to pay IHT on any amount above the tax threshold of £325,000, ie 40% of £40,000 = £16,000. (Is this correct?)

If Mr X gives away the cash as a gift, his children would be liable to pay IHT (provided it was within 7 years of his death), but what if Mr X decided to play poker (say) against one of his children in any of the well known poker sites and went on to lose all of his £40,000 to said child. They would lose a small percentage in rake fees to the site, but this is neglible.

This wouldn't be a gift, and so wouldn't be liable to IHT. Income from poker is not liable to tax in the UK. (Is this correct?)

I'm in no position to benefit from doing this currently, and wouldn't recommend it to anyone who didn't know much about online poker. I'm just curious as to whether this would be a possible way to avoid IHT.

Thanks

isildur2

Savvy_Sue

One would have to ask first whether Mr X hadn't at some point had a Mrs X, and whether or not she was still alive, and if not was she married to Mr X at the time of her death.

If she's still alive and married to Mr X, then the simpler method is to pass some of the estate to her, and if she's deceased but was married to Mr X at the time of death, then his IHT-free zone is potentially doubled if she left up to the personal limit to him.

In any event, I'm sure that 'proper' estate planning is a safer bet than online poker, 'proper' being the kind you pay for. Indeed, I'd run the online poker idea past the 'proper' adviser and see what they say. :rotfl:

TheCyclingProgrammer

Online poker idea is creative, but if discovered would seem like the sort of thing that HMRC would pursue under the GAAR (http://www.hmrc.gov.uk/avoidance/gaar.htm) to me.