My Mother's Savings and Inheritance Tax

spoonface

hello i'm spoonface! my first post on what seems a very informative website.

my Mother is healthy and well and wants to transfer a large sum of cash from her savings account to my own. is there anything i need to consider here? will the Inland Revenue and /or concerned bank accounts be asking any questions?

i understand there are limits to to the value of gifts that can be passed onto me during the seven years preceding death. what are those limits and how is the above transaction effected by these rules if at all?

many thanks.

spoonface.

grumbler

Inheritance Tax (IHT)
IHT2 - Inheritence Tax - Lifetime gifts
You are right about 7 years.
For 2005/06, the tax threshold is £275,000. As far as I understand, this is for the whole inheritance including gifts during 7 years before death.

spoonface

thanks. so a simple of transfer of cash from her account to mine would be classified as a gift?

how does the inland revenue keep track of transfers such as these? i'm a little flummoxed here.

grumbler

Also:
IHTM14141 - Annual exemption: summary

'A person's lifetime gifts are exempt up to a total of £3,000 in an income tax year - 6 April to 5 April the following year.'

How does the inland revenue keep track of transfers such as these?

I don't know. I am not expert in tax evasion :eek:

lisyloo

is there anything i need to consider here?

Hi spoonface,

I don't know how old your mother is but there is a possible long term care issue if she is elderly.
It's not legal to "deliberately deprive" yourself of assets to gain state benefits.
If she needed long term care and it was found that she had passed on loads of money to you, then the local authority might see this as "deliberate deprivation of assets".
Basically they can get a court order to get the money back (ther eis no time limit and cases have gone back 18 years).

how does the inland revenue keep track of transfers such as these? i'm a little flummoxed here.

They don't keep track of it. It's just a very serious crime if you try to evade tax.
This means that if you get caught then they will turn your house upside down to find every bit of paper in it.
If you are found to have commited fraud then you might have to pay a fine or go to prison. You would find it difficult to get a job or take out any kind of credit with a conviction.
So basically they might not find out but the penalties are pretty severe if they do happen to find out by a random check.

You might also get some hassle from your bank about large amounts as they now have obligations under the money laundering regualtions.
this means they will want to check that you aren't laundering drug money or something like that.
I don't think this will be a problem in your case, but you just might get some hassle.

Hope that helps

spoonface

that's helpful although i'm not evading tax. just curious about how all of this works. so how and when exactly am i supposed to report such a transfer? is it for me to do or my mother?

many thanks once again :-)

pmd

spoonface wrote:

that's helpful although i'm not evading tax. just curious about how all of this works. so how and when exactly am i supposed to report such a transfer? is it for me to do or my mother?

many thanks once again :-)

As I understand it, whoever fills in the forms for probate after your mother dies will have to declare any substantial gifts given in the 7 years before she died - because these (with some "tapering") will be added to what she leaves when she dies for Inheritance Tax purposes (ie, in broad terms, anything above the limit of £275,000 gets taxed at 40%). She can also give away up to £3000 each tax year as gifts, and also up to £250/year to as many individuals as she likes, and gifts to charities and political parties, without any of these coming under Inheritance Tax.

The Inland Revenue have some clear leaflets and their own amazingly detailed IHT manual, all available at http://www.hmrc.gov.uk/cto/iht.htm - I looked at it just now myself before asking a qn on this board and found the answer (that a gift of up to £5k on a son or daughter's wedding is exempt but only if given on or before the wedding... as my sister is getting married in 5 days time and my parents are 87 and they've got some spare cash but we hadn't thought about this until today, some fast action may be needed!).

The social services / deprivation of resources aspect is something completely different of course.

Cheers, Pam

spoonface

thanks pam :-)

so just to clarify no action would need to be taken now? but i may be required to provide details at a later date?

she's doing ok moneywise and won't be claiming benefits.

i'm just intrigued by all these rules. how on earth does any of this come to light? how does the benefits agency come to learn of lumpsums paid away months and years ago?!?

spoon.

lisyloo

so just to clarify no action would need to be taken now? but i may be required to provide details at a later date?

Yes, so a good idea to keep the records for 7 years.

she's doing ok moneywise and won't be claiming benefits.

I am not sure how you can guarantee this.
None of us know if we will be run over by a bus and need full time care (OK, it's unlikely I admit).

how on earth does any of this come to light? how does the benefits agency come to learn of lumpsums paid away months and years ago?!?

When you want to claim benefits you have to fill in forms and there will be questions about your assets.
Some people lie and take their chance, but as I have explained this is illegal and there can be serious conseqeuences so there is also a deterrent.

Depending on how closely the LA want to follow it up then they can get court orders to get bank information etc.
They might get suspicious for example if an old person wanting care lived in a house owned by their daughter or son.
In this case they simply have to look up the land registry information about who owned the house in the past to see if it was transferred and then look up bank details of the various parties to see if money was transferred.
If you've lied on any forms then you're in trouble.

Obviously they won't do this in all cases (as it's too much work), but an enormous house and no money might be a case where they look further.
They will almost certainly asks who owns the house and ask what assets the person has as standard and follow up in cases where it looks like the person might have off loaded their money. Of particular interest would be houses owned by close family as this is not considered "at arms length" i.e. there might have been a favour done rather than sold at market value.

There is also a chance that the benefits people can be tipped off in benefit fraud cases.

Of course, some people do lie and get away with it and the burden then falls to the tax payer.

spoonface

interesting stuff!

thanks lisyloo.

sneekymum

Goodness - all this misery about people being taken to court for evading tax and trying to get free benefits!

Of course your mother can make a lifetime gift - its called a "Potentially Exempt Transfer". It enjoys taper relief and so if mother dies before seven years are up only a percentage of the tax is due on it. The tax isn't actually due on the gift itself anyway - if there are enough assets left in her estate then that would pay any tax due before a distribution.

As the recipient of many wonderful PETs I keep a register with bank statements (mine and mother's) as evidence. The important thing is that the gift must be without reservation - i.e. mother is giving you the money to do as you wish with - not just to get it outside her estate for tax purposes. As the recipient there's nothing to stop you from deciding to keep the money safe in case you choose to give it back or spend it on care for her in her old age. I choose to keep "PET Funds" for this possibility. The tax man could be suspicious if I did this while still paying a mortgage / car loan etc.

The £3000 per year limit includes this year and the previous (if unused). So the most efficient way would be to give a lump every two years.

If you don't need the money and mother might not survive seven years she could consider an offshore single-premium insurance policy written in trust to you. This is a sort of policy where the money is no longer mother's as part of her estate for IHT as its spent on a life premium but the trust created holds an equal amount as a growing investment. You can get more information on these from all the big name insurers but you'll do best to buy one through an IFA. Getting the money back triggers a Capital Gains Tax charge and possibly a MVA fee (applied by the insurance company to protect others in the fund). If money is held in trust for you it forms part of your estate for IHT purposes and so if you die before your mother there may be tax due on assets you don't have (if your total assets exceed the threshold).

The notion of giving away assets to get free benefits simply disgusts me. That my mother - who has given me so much - should ever be reduced to seeking council care is not even worthy of discussion.