IHT monetary gifts from surplus income

Golfygavin

My mum will shortly receive funds from the sale of my late father's investments. She would like to split this between me and my brother. I am aware this will be added to the value of her estate for IHT purposes. I should point out she has her own investments, more than enough should she ever require care, and this won't be touched. Will this cheque from dads estate be considered income (not capital)? If my mum reduced the size of the cheque she paid my brother and I, and set up standing orders to us both for a set amount, say monthly, and declared by writing a letter that this was her intention, and that the money gifted away would have no effect on her standard of living, would the amount gifted via the standing order be considered exempt?

antrobus

Golfygavin wrote: »

My mum will shortly receive funds from the sale of my late father's investments. She would like to split this between me and my brother. I am aware this will be added to the value of her estate for IHT purposes. I should point out she has her own investments, more than enough should she ever require care, and this won't be touched. Will this cheque from dads estate be considered income (not capital)? ...

I'd say it was capital. It will only count as part of her estate for IHT purposes if she dies within the next seven years.

Golfygavin wrote: »

...If my mum reduced the size of the cheque she paid my brother and I, and set up standing orders to us both for a set amount, say monthly, and declared by writing a letter that this was her intention, and that the money gifted away would have no effect on her standard of living, would the amount gifted via the standing order be considered exempt?

Gifts out of income are indeed exempt. They need to be regular (a standing order shows that), that she has sufficient income to cover the payments, and that they leave her with enough to to maintain her standing of living. You would have to do the math.

If she also has enough money to cover any future care home fees, that's a bonus; deprivation of assets won't be considered. Again, you would have to do the math.

getmore4less

The problem with gifts from income is that wont work to reduce the capital assets of the estate so does not improve the IHT situation

You cannot gift from income and live of capital.

Apodemus

If it is not too late, could you consider a deed of variation on your father's will, so that the estate pays out directly to you and your brother? My understanding is that this would avoid the money ever being your mothers (and the seven year issue on your mother's IHT) but others on here could advise if that is indeed the case.

Golfygavin

We considered a deed of variation, however the solicitor advised this would affect dads nil rate band which was passed onto mum, meaning her overall threshold would be considerably reduced

Apodemus

That makes sense.

antrobus

getmore4less wrote: »

The problem with gifts from income is that wont work to reduce the capital assets of the estate so does not improve the IHT situation...

The IHT gifts out of income exemption only applies to surplus income. Income that is not spent becomes capital so, yes it does reduce the capital assets of the estate.

getmore4less wrote: »

...You cannot gift from income and live of capital.

But you can gift from income, and live off the income produced by capital.

getmore4less

With the transferable nil rate band a DOV becomes a neutral IHT event for the spouse.
Whatever you give away take nil rate band with it.

They can then gift which no longer forms part of the estate after 7 years if the donor does not last then the gift uses the nil rate band that came with it.

Gift rarely make a IHT situation worse than it would be without a gift.

If the full estate transferred to spouse the first £650k is IHT free,

If there is a property to leave to children then this rises, starting with an extra £200k from 6 April 2017 up to £1m by April 2020.

As this is less than 7y gifts for IHT planning starts on assets over £1m.