PETs - IHT403

Tom99

Robert_McGeddon wrote: »

MumOf2,

Sounds like you're well organised and thinking ahead - good news.

Congrats on your successful probate exercise. Did it include paying IHT? If so, then double congrats!

I hadn't realised until your most recent post that you were referring to a future probate situation. I may be speaking out of turn but I really think you should consider getting your relative to get professional estate planning advice. The cost would be paid before probate and would therefore be tax effective. IHT of £500K implies an estate worth circa £1.7 - £2.2Million. This is substantial. It is possible that actions taken while your relative is still alive could result in more of the estate being passed on. An immediate thought is that if a large chunk is earmarked for you and in turn you intend passing the residue on to your kids then there will be a 2nd IHT hit. Bypassing you or setting up a trust may mitigate some of this. If the advice costs £5,000 that's only 1% of the tax involved. I think it likely the advice would pay for itself and even if if didn't at least you get certainty that you weren't paying too much tax. I'd personally aim for a medium sized firm of Chartered Accountants with estate planning specialism. But I'm speculating . . . and well outside your original post!

A deed of variation would deal with that.

Robert_McGeddon

Tom99 wrote: »

A deed of variation would deal with that.

Agreed.

But the mindset to address the issues before they become issues can only be positive. It seems MumOf2 has the opportunity to work with her relative to do some estate planning in advance of sorting out the estate. Many (maybe most) people do not. Perhaps it's already in place. If not, in her shoes, I'd be on to it pronto.

MumOf2

Thanks all again. I'm afraid there's a bit of strong will going on here (no pun...) and a refusal to bypass me to benefit the next generation either directly or via a trust or deed of variation. Oh dear. So we are where we are and at the end of it all we've had so much benefit over so many years, and the grandchildren have also benefited hugely with independent education, university under graduate and post graduate study then professional exams which have set them up in fabulous occupations. So we're all pretty philosophical about IHT and just really want to get it right by HMRC whilst still ensuring that we don't pay too much because of technical ignorance!

Having said this, the last professional advice (a high street Bank) was that as much as possible should be paid directly from the 'donor' to, say, a supplier rather than transferring money to the donee's account who then pays the supplier. So, e.g., a car is purchased directly by the donor from the car dealer. The Bank said this wouldn't be counted as a gift or be used in any IHT calculation so would reduce the amount of IHT. But now I realise that, although it wouldn't be on the list as a gift, it would indeed be an item of expenditure which would decrease any surplus income from which the PETs come, so it's as broad as long whether it's paid directly to the supplier (expenditure) or via the donee (PET). Either way, when you get to the bottom line it's the same effect. Same as a mortgage which was paid monthly from the donor to the bank with which the mortgage was held (which was in the donee's name). The Bank said it would reduce IHT as the gift hadn't been given to the donee who then made the mortgage payment, but it's the same as the car - either way it comes out as an item of expenditure or as a PET.

So I'm not sure this advice was exactly robust!

Hope you're all enjoying the sun today.

MumOf2
x

MumOf2

Robert - re probate just completed. This was more straightforward as it was just under the IHT threshold with two thresholds (£650) and two primary residence nil rate bands (£250). Having got all the papers and figures together in a fortnight, it then took us 30 minutes to complete the form, take photocopies for our records and walk to the post office. We had been quoted a flat fee plus 2% of the estate but I thought we should have a go ourselves. Three weeks later we received the grant of probate. Completion on sale of house four weeks after that to cash buyer.

The next one will take a little longer...

MumOf2
x

getmore4less

MumOf2 wrote: »

Thanks all again. I'm afraid there's a bit of strong will going on here (no pun...) and a refusal to bypass me to benefit the next generation either directly or via a trust or deed of variation. Oh dear. So we are where we are and at the end of it all we've had so much benefit over so many years, and the grandchildren have also benefited hugely with independent education, university under graduate and post graduate study then professional exams which have set them up in fabulous occupations. So we're all pretty philosophical about IHT and just really want to get it right by HMRC whilst still ensuring that we don't pay too much because of technical ignorance!

Having said this, the last professional advice (a high street Bank) was that as much as possible should be paid directly from the 'donor' to, say, a supplier rather than transferring money to the donee's account who then pays the supplier. So, e.g., a car is purchased directly by the donor from the car dealer. The Bank said this wouldn't be counted as a gift or be used in any IHT calculation so would reduce the amount of IHT. But now I realise that, although it wouldn't be on the list as a gift, it would indeed be an item of expenditure which would decrease any surplus income from which the PETs come, so it's as broad as long whether it's paid directly to the supplier (expenditure) or via the donee (PET). Either way, when you get to the bottom line it's the same effect. Same as a mortgage which was paid monthly from the donor to the bank with which the mortgage was held (which was in the donee's name). The Bank said it would reduce IHT as the gift hadn't been given to the donee who then made the mortgage payment, but it's the same as the car - either way it comes out as an item of expenditure or as a PET.

So I'm not sure this advice was exactly robust!

Hope you're all enjoying the sun today.

MumOf2
x

IT is still a gift(PET) if the car goes to someone.

One of the key criteria on gifts from income is they are "normal expenses" sometimes looked at regular(but they don't have to be the same every time).

Covered partialy in the manual
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250


Buying cars probably would not qualify unless there was a pattern.
paying a mortgage has a pattern.

MumOf2

Thanks, GetMore. That's really useful in distinguishing between a PET from income (regular gifts - monthly cash, mortgage, etc.) and one-off gifts. I'll have a look at the manual you cite.

You've all been really helpful and have provided so much useful information to mull over as we go forward with getting all the figures together. Thanks, all of you.

MumOf2
x

getmore4less wrote: »

IT is still a gift(PET) if the car goes to someone.

One of the key criteria on gifts from income is they are "normal expenses" sometimes looked at regular(but they don't have to be the same every time).

Covered partialy in the manual
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250


Buying cars probably would not qualify unless there was a pattern.
paying a mortgage has a pattern.

Yorkshireman99

MumOf2 wrote: »

Thanks, GetMore. That's really useful in distinguishing between a PET from income (regular gifts - monthly cash, mortgage, etc.) and one-off gifts. I'll have a look at the manual you cite.

You've all been really helpful and have provided so much useful information to mull over as we go forward with getting all the figures together. Thanks, all of you.

MumOf2
x

Good as the advice on here often is be careful to cross check. HMR&C manuals are not always easy to understand and may not be up to date. As a general rule don’t be too greedy in claiming gifts out of income since HMR&C can be very unforgiving if the suspect someone is trying it on.

MumOf2

An update - my mother passed away suddenly in the early hours of yesterday morning. I'm unable to sleep and am revisiting the issue of accounts and IHT using the invaluable HMRC manuals, getting my head around the current situation and 31 March 2020 deadline for IHT and the need to raise funds to pay either through the bank or by using the HMRC instalments system. Because we can't sell the house before getting grant of probate and can't get grant of probate until IHT is paid, we definitely won't have the funds to pay c.£500K in IHT. So then they 'tax' you even more but call it 'annual interest' and 'interest on repayment'. Oh dear...

Anyway, I'll now start on 6 April 2012 and finish on 21 August 2019. I've done the first year so we'll be looking at 2013/14 tax year next. The first few months aren't available online any more but fortunately mum kept all her bank statements so we can do it from there.

Once the data are inputted and draft estate accounts prepared, we'll decide whether to go to an estate/probate specialist. At least the legwork will have been completed.

What I have found out is that mum had two current accounts, which could well fall into the category identified in MacDowall when it was held that lifetime gifts were exempt when paid from current accounts which held "identifiably money which was essentially unspent income and not invested in any more formal sense".

In addition, there is provision in the 'Usual standard' para for exempting transfers which were started when income was higher and no reduction in income was foreseen. This is the case here - the regular transfers were started in March 2004 when dividends and interest rates on ISAs, etc. were so much higher, then came the 2008 banking crisis and dividends went through the floor in the banking sector which caused a significant reduction in income. However, the transfers continued on the same regular basis and in the same amounts as before drawing on the second current account when necessary.

Living standards didn't change at all; it was just that there was a good surplus between 2004 and 2008, and a small deficit since then. The deficit never became critical and there was always a healthy balance in the current accounts; living standards were never compromised mainly because as someone becomes older their needs become fewer. The car wasn't used so no running costs, mum couldn't go out, ate very very little, didn't buy new clothes, did less and less, really just spent time with the family in her home. It wasn't for want of trying on our part; it was just what mum wanted.

Sorry for the essay and thanks for reading.

MumOf2

Tom99

MumOf2 wrote: »

An update - my mother passed away suddenly in the early hours of yesterday morning. I'm unable to sleep and am revisiting the issue of accounts and IHT using the invaluable HMRC manuals, getting my head around the current situation and 31 March 2020 deadline for IHT and the need to raise funds to pay either through the bank or by using the HMRC instalments system. Because we can't sell the house before getting grant of probate and can't get grant of probate until IHT is paid, we definitely won't have the funds to pay c.£500K in IHT. So then they 'tax' you even more but call it 'annual interest' and 'interest on repayment'. Oh dear...

Anyway, I'll now start on 6 April 2012 and finish on 21 August 2019. I've done the first year so we'll be looking at 2013/14 tax year next. The first few months aren't available online any more but fortunately mum kept all her bank statements so we can do it from there.

Once the data are inputted and draft estate accounts prepared, we'll decide whether to go to an estate/probate specialist. At least the legwork will have been completed.

What I have found out is that mum had two current accounts, which could well fall into the category identified in MacDowall when it was held that lifetime gifts were exempt when paid from current accounts which held "identifiably money which was essentially unspent income and not invested in any more formal sense".

In addition, there is provision in the 'Usual standard' para for exempting transfers which were started when income was higher and no reduction in income was foreseen. This is the case here - the regular transfers were started in March 2004 when dividends and interest rates on ISAs, etc. were so much higher, then came the 2008 banking crisis and dividends went through the floor in the banking sector which caused a significant reduction in income. However, the transfers continued on the same regular basis and in the same amounts as before drawing on the second current account when necessary.

Living standards didn't change at all; it was just that there was a good surplus between 2004 and 2008, and a small deficit since then. The deficit never became critical and there was always a healthy balance in the current accounts; living standards were never compromised mainly because as someone becomes older their needs become fewer. The car wasn't used so no running costs, mum couldn't go out, ate very very little, didn't buy new clothes, did less and less, really just spent time with the family in her home. It wasn't for want of trying on our part; it was just what mum wanted.

Sorry for the essay and thanks for reading.

MumOf2

I think the 1st of the 10 installments will be due on 29th Feb (end of 6th month) not 31st Mar 2020 and interest would only be due from that date.

If you elect for installments you only pay the IHT due on cash/shares now in order to obtain probate, then with tax due on the house in 10 installments. The total IHT bill is apportioned over all the taxable assets to work out how much you can defer on the house.
Re gifts from income it seems you might be trying to carry over surplus income for more than two year which, whilst not ruled out completely, you may well be asked to show evidence this accumulated income had not become capital.

badger09

MumOf2 wrote: »

An update - my mother passed away suddenly in the early hours of yesterday morning. I'm unable to sleep and am revisiting the issue of accounts and IHT using the invaluable HMRC manuals, getting my head around the current situation and 31 March 2020 deadline for IHT and the need to raise funds to pay either through the bank or by using the HMRC instalments system. Because we can't sell the house before getting grant of probate and can't get grant of probate until IHT is paid, we definitely won't have the funds to pay c.£500K in IHT. So then they 'tax' you even more but call it 'annual interest' and 'interest on repayment'. Oh dear...

Anyway, I'll now start on 6 April 2012 and finish on 21 August 2019. I've done the first year so we'll be looking at 2013/14 tax year next. The first few months aren't available online any more but fortunately mum kept all her bank statements so we can do it from there.

Once the data are inputted and draft estate accounts prepared, we'll decide whether to go to an estate/probate specialist. At least the legwork will have been completed.

What I have found out is that mum had two current accounts, which could well fall into the category identified in MacDowall when it was held that lifetime gifts were exempt when paid from current accounts which held "identifiably money which was essentially unspent income and not invested in any more formal sense".

In addition, there is provision in the 'Usual standard' para for exempting transfers which were started when income was higher and no reduction in income was foreseen. This is the case here - the regular transfers were started in March 2004 when dividends and interest rates on ISAs, etc. were so much higher, then came the 2008 banking crisis and dividends went through the floor in the banking sector which caused a significant reduction in income. However, the transfers continued on the same regular basis and in the same amounts as before drawing on the second current account when necessary.

Living standards didn't change at all; it was just that there was a good surplus between 2004 and 2008, and a small deficit since then. The deficit never became critical and there was always a healthy balance in the current accounts; living standards were never compromised mainly because as someone becomes older their needs become fewer. The car wasn't used so no running costs, mum couldn't go out, ate very very little, didn't buy new clothes, did less and less, really just spent time with the family in her home. It wasn't for want of trying on our part; it was just what mum wanted.

Sorry for the essay and thanks for reading.

MumOf2

So sorry to hear of your loss.

I've been following your thread, can't offer any advice on your IHT issues, but didn't want to read and run.

I can identify with your inability to sleep, and spent many useful hours in the middle of the night, writing letters & drawing up lists when I was executor for my sister last year. It's something to focus on and feels so much better than just lying in bed churning things over.

Please give yourself time, and permission to grieve though. Even when its expected, death of a loved one is still a shock to the system, as you already know. Look after yourself.