Do monetary gifts have to be physically transferred before death to count as a gift/surplus income?

sirbb

Do monetary gifts have to be physically transferred before death in order to count either as a gift or as "surplus" to income?

My mother, who has died, had a saving account (in her name only) set up specifically for myself and my wife in which she deposited £3000 per annum each for myself and my wife as well as surplus income.  This money was intended to be for us a "rainy day" or as our pension. There was an established pattern of saving into that account over 10+ years.
I have letters of wishes written every year clearly stating that she was "gifting" that money to be free of IHT etc. etc. and that this was a pattern etc. etc. but that the money is also in that account until such time it is required.

Where do I stand with regard to IHT given that the money in that account falls under the "£3000 per annum per person gift allowance" and "gifts from surplus income" categories? (Her estate is over the threshold so regardless of the answer there will be still be IHT to be paid.) The sticking point, I believe, is over whether it qualifies because it was not physically transferred over into an account in my name.

Thank you for your advice.

Dox

If the money is held in an account in her name, it belonged to her at the time she died, so I'm afraid it is subject to IHT. HMRC are all too used to seeing this sort of 'argument' about savings and will take the line that she could always have put the money in an account in your name.

sirbb

It was indeed in her account but I have letters of wishes from each year and a pattern over many years too clearly showing that the money had been gifted but was growing interst in her account (specifically set up for this purpose) - does that not count against IHT? 

xylophone

was growing interst in her account (specifically set up for this purpose) 

Taxed as her income?

I think you would have a hard time convincing HMRC that your mother was not both the legal and beneficial owner of the funds in the account.

She was perfectly at liberty to access those funds for her own use at any time, regardless of the fact that she  told you that they were intended as a gift to you.

She could have set up a bare trust for the money with herself as Trustee ( although as an adult you could have called for access and control at any time) and given you a certificate to show the interest paid so that you could declare it/seek a refund (as appropriate). There would then have been no doubt that you were the beneficial owner of the funds.

If the funds were intended for retirement, she could have made regular contributions to your pension funds.

tacpot12

HMRC has to enforce this rule otherwise some unscrupulous people could use this technique to allow them receive more state benefits than they are entitled to. 

Keep_pedalling

sirbb said:

It was indeed in her account but I have letters of wishes from each year and a pattern over many years too clearly showing that the money had been gifted but was growing interst in her account (specifically set up for this purpose) - does that not count against IHT? 

Letters of wishes are not binding, they are exactly what they say they are. She wished to gift this money to you but for some obscure reason never did so. Gifts have to be absolute, this money was still available to her and she could have changed her mind and spent it on anything she wished, or it could assessed as part of her assets if she had ever needed care.

sirbb

Presumably if she had transferred the money across to me prior to her death and it's all either came under the annual gift relief or else gifted as excess incomeetc, it would not be subject to IHT? 

TripleH

If I understand correctly, it also comes down to control of the funds. If your mother had access to the funds to add and remove as she desired it is likely that HMRC will see that money as hers.
If she had paid the money into an account in your name that she couldn't take funds from then HMRC would be swayed to accept the money was a gift. Did you have access to the account where the funds were held and could you remove money yourself?

sirbb

Yes I had access. 

Keep_pedalling

sirbb said:

Yes I had access. 

The question was whether she had access, and I can’t see a reason why the owner of a sole account would not have access. How exactly did you have access to her account?

The big question is why she put this money into her own account rather than simply gift it to you? 

Keep_pedalling

sirbb said:

Presumably if she had transferred the money across to me prior to her death and it's all either came under the annual gift relief or else gifted as excess incomeetc, it would not be subject to IHT? 

Not if she had done it all in one lump sum, only 2 years of exempt allowances could be claimed. Gifts from excess income could be claimed, but you would need damn good financial records to show it was built up from excess income.