IHT and potentially exempt gifts

kkgree1

A family member has recently sold their main property and wishes to gift around 100k to each of her two children.

Although she lives full-time in a care home, they have planned accordingly and she does not have to worry about deprivation of assets as the care fees are paid from another source of income.

I am trying to help her find out about the 7 year rule on gifts as the children are concerned that they would be liable for IHT on the potential gift, if for any reason she does not live for 7 years. They are the only beneficiaries of her will - can anyone confirm whether the IHT on non-exempt gifts can be paid directly out of the residual estate or whether it would need to be met by both children?

This will make a difference as one plans to use the gift to fund an extension and needs to know whether the potential IHT money should be kept aside to pay HMRC if needed!

She is a divorcee so there is no transfer of allowance applicable.

Many thanks

getmore4less

The gifts use up the nil rate band first, then the estate is taxed with whats left of the nil rate band.

It is very rare that a recipient of a PET(where the total of the PETS are below the nil rate band) gets chased for tax because the estate can't pay.

eg if she gifts £200k then the nil rate band of the este is £125k(+ any transferable nil rate band)


Some may say you add the value back into the estate but that is not the mechanism used by HMRC.

Morganic

For the estate to be liable for IHT then its total value would have to exceed 325K including the 200K in gifts (assuming here a death wining seven years). But means the residual estate would still have 125K in it - enough to pay any IHT due.

So there is no need for the gift recipients to retain 40% of the gifts.

Incidentally, holdings in qualifying AIM shares become exempt in just two years. So if time is of the essence, the funds could instead be used to buy AIM shares, which would become exempt in just those two years, and then gifted in specie.

AIM shares are more risky, of course, but a diversified portfolio of AIM shares that pay dividends could work