IHT & Lifetime Gifts (& Taper Relief?)

c_lothian

Hi all.

I am an executor of my Dads Will, and trying to calculate the IHT Bill due.

He was divorced and is leaving his house (mortgage free) to us 3 children, so I believe the Threshold is £425k.

As well as what I believe are Tax Exempt Gifts (£1k to each child in the 5 years prior to his death), he also gave us each a Lifetime Gift within 7 years of his death, but a differing points:
£10k to child 1, 4 years prior.
£10k to child 2, 2 years prior.
£10k to child 3, 2 years prior.

Before taking into account the Lifetime Gifts, we believe the Estate Value will approx. £575k.

I have seen in different places, different ways of how the Lifetime Gifts affect the IHT, but there is lots of contradictory information.

Could someone please explain what IHT is due on each of the Lifetime Gifts (initially I thought that Taper Relief applies, but I have read in some places that this only applies if more that £325k is given away prior to death)?

Keep_pedalling

The gifts go back into his estate for IHT purposes, so will add £30k and £12k to the IHT bill, which would normally be paid from the residual estate. Taper relief only kicks in if you make total gifts exceeding your nilrate band.

If any of these gifts were given shortly before the recipient got married you can use the contemplation of marriage exemption which will take that gift out of his estate in its entirety, as each parent has a £10k allowance for that.

getmore4less

The £3k(£1k to each of 3 kids) annual got used up for the previous 5 years

BUT if there was sufficient income to cover that £3k per year they could fall under the regular gift from income exemption.

That would then free up 4x£3k for the annual exemption. 5/4 then 3/2

Keep_pedalling

getmore4less wrote: »

The £3k(£1k to each of 3 kids) annual got used up for the previous 5 years

BUT if there was sufficient income to cover that £3k per year they could fall under the regular gift from income exemption.

That would then free up 4x£3k for the annual exemption. 5/4 then 3/2

You can’t actually use both together as the annual exemption counts as expenditure, so if you have less than £3000 spare income before gifting, you cant have more than £3000 exempt gifts. If your spare income is over £3000, then you can gift all of that as exempt gifts.

Tom99

[FONT=Verdana, sans-serif]I also think there should be 4 x £250 small gift exemptions to allocate as follows:

[/FONT] [FONT=Verdana, sans-serif]Year 4 – Child 1 £3,000; Child 2/3 £250 each[/FONT]
[FONT=Verdana, sans-serif]Year 2 – Child 2 £3,000; Child 1/3 £250 each

[/FONT] [FONT=Verdana, sans-serif]So unless the 3 x £1,000 can come from surplus income then £29,000 would be deducted from nil rate band.

[/FONT] [FONT=Verdana, sans-serif]If the surplus income route is to be followed then a detailed breakdown of all income and expenditure for all those years will need to be provided which may not now be available.[/FONT]

Keep_pedalling

Tom99 wrote: »

[FONT=Verdana, sans-serif]I also think there should be 4 x £250 small gift exemptions to allocate as follows:

[/FONT] [FONT=Verdana, sans-serif]Year 4 – Child 1 £3,000; Child 2/3 £250 each[/FONT]
[FONT=Verdana, sans-serif]Year 2 – Child 2 £3,000; Child 1/3 £250 each

[/FONT] [FONT=Verdana, sans-serif]So unless the 3 x £1,000 can come from surplus income then £29,000 would be deducted from nil rate band.


[/FONT] [FONT=Verdana, sans-serif]If the surplus income route is to be followed then a detailed breakdown of all income and expenditure for all those years will need to be provided which may not now be available.[/FONT]

From the opening post I read that each child got 1/3 of the annual allowance each year, so they can’t knock the small gift allowance off that. Gifting does not effect the nil gate band, non exempt gifts are simply added to the estate. They would reduce the transferable nil rate band but that is not relive the in this case as the deceased was divorced.

Tom99

Keep_pedalling wrote: »

From the opening post I read that each child got 1/3 of the annual allowance each year, so they can’t knock the small gift allowance off that. Gifting does not effect the nil gate band, non exempt gifts are simply added to the estate. They would reduce the transferable nil rate band but that is not relive the in this case as the deceased was divorced.

[FONT=Verdana, sans-serif]Yes that's one way of looking at it, but I interpret the £250 per person allowance as a ceiling on the allowance for that person not a limit on the gift to that person.[/FONT]
[FONT=Verdana, sans-serif]So if one child had £10,000 that year the £3,000 would be claimed against that gift. Then if child 2 and 3 each had £1,000 then the 1st £250 of those two gifts are also tax free.[/FONT]

Keep_pedalling

Tom99 wrote: »

[FONT=Verdana, sans-serif]Yes that's one way of looking at it, but I interpret the £250 per person allowance as a ceiling on the allowance for that person not a limit on the gift to that person.[/FONT]
[FONT=Verdana, sans-serif]So if one child had £10,000 that year the £3,000 would be claimed against that gift. Then if child 2 and 3 each had £1,000 then the 1st £250 of those two gifts are also tax free.[/FONT]

No, the small gift allowance is not additional to larger gifts, it is for gifts to individuals who receive nothing else. As a couple we gift out full allowance to our 2 children, anything above that falls under the 7 year rule, we can however each give £250 to their spouses, and their children.

https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax

Tom99

Keep_pedalling wrote: »

No, the small gift allowance is not additional to larger gifts, it is for gifts to individuals who receive nothing else. As a couple we gift out full allowance to our 2 children, anything above that falls under the 7 year rule, we can however each give £250 to their spouses, and their children.

https://www.moneyadviceservice.org.uk/en/articles/gifts-and-exemptions-from-inheritance-tax

[FONT=Verdana, sans-serif]Yes I can see now you are right, so a gift of £250 is exempt but one of £251 is not and could end up being taxed at 40%[/FONT]

getmore4less

Keep_pedalling wrote: »

You can’t actually use both together as the annual exemption counts as expenditure, so if you have less than £3000 spare income before gifting, you cant have more than £3000 exempt gifts. If your spare income is over £3000, then you can gift all of that as exempt gifts.

According to the HMRC manual you exempt all the gifts from income and can then use the annual exemption on top.


https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14132

c_lothian

Thank you - I was meaning what would be the IHT due on the Lifetime Gifts (I've now edited the post, as originally in question sentence I only asked about Gifts)?