Calculating retrospective IHT

aroominyork

If a gift of £100,000 is made less than three years before a person dies and their estate is above the IHT threshold, is the amount of retrospective IHT on the gift 40% of £100,000 = £40,000 or, as I imagine, 40% of the grossed up amount ie 40% of £166,666 = £66,666?

Edit: I think I'm wrong and it's 40% of £100,000. Someone please confirm!

HappyHarry

IHT isn't grossed up, so a £100,000 excess leads to a £40,000 IHT liability. However, it is unusual for IHT to be retrospectively applied to gifts.

Firstly, did any gifts made by the deceased in the seven years before death exceed £325,000?

If not, then the deceased's Nil Rate Band is simply reduced by £100,000, and there is no retrospective tax on the gift. Effectively, the estate pays the IHT.

If gifts over the seven years did exceed £325,000, then the order of gifts is important, to establish who may have to pay the IHT at 40%.

Are you able to provide more details?

aroominyork

Gifts over £325,000 were made in the last seven years, though some would be eligible for taper relief (made more than three years ago). If the estate is large enough to pay the IHT on these gifts after decease, is the order of gifts relevant? Or is the order only relevant if the estate cannot meet the IHT liability and the people who received the gifts need to be approached to cover the liability?

HappyHarry

The order is important, as it is the recipient of the gift who becomes liable for the IHT on their gift under these circumstances. Only if the recipient is unable or unwilling (would need legal advice here) would the estate become liable.

aroominyork

Many thanks, Harry. In Dec 2015 a gift of £300k was given to one grandchild. In Feb 2017 a gift of £300k was given to the other grandchild. Various other gifts totalling about £100k were given to children and grandchildren over the last five years. The estate size is c.£1.8m and the Will makes legacies of £100k to each of the two grandchildren, legacies of £10k to two other individuals, legacies of £80k to charities, and the residue divided equally between two children. My question is how the IHT on the 2 x £300k is paid (and on the other £100k of various gifts) and hence how this affects the two residuary beneficiaries. PS Does the main residence benefit affect this issue?

HappyHarry

Do the executors have any other Nil Rate Bands or RNRBs available? E.g. from a late spouse?

Were the £300k gifts solely from the deceased or joint with a late spouse?

Assuming single with no other NRBs and death prior to Feb 2020 then I believe ;

Recipient of Dec 2015 gift has no IHT to pay ( All within NRB)

Recipient of Feb 2017 gift has IHT of 40% of anything above the remaining NRB to pay.
 i.e. 40% of (£275,000 less annual £3,000 exemptions used in this and previous gift)

Recipients of pre-death £100k to pay IHT of 40% on any non-exempt part of gifts.

Remaining estate is £1.8m so qualifies for RNRB (gifts during lifetime can be ignored) so IHT of 40% to be paid by estate on (£1,800,000 - £150,000 RNRB - £80,000 charity) prior to any distributions.

If death was after Apr 2020 then RNRB will be £175,000.

If death was after Feb 2020 then recipient of the Feb 2017 gift will pay IHT at 32% rather than 40% (due to taper relief).

Happy to be corrected by other posters if anyone sees anything incorrect in above.

*edited to note charity legacy.

aroominyork

Do the executors have any other Nil Rate Bands or RNRBs available? E.g. from a late spouse?
He continued to live in the house of his wife who died in 2011. Does this mean he would get her main residence allowance? 
Were the £300k gifts solely from the deceased or joint with a late spouse?
Solely from him.

Very much appreciated, Harry. I also found some nice examples of IHT on lifetime gifts on this site 

https://www.which.co.uk/money/tax/inheritance-tax/inheritance-tax-planning-and-tax-free-gifts-aw1mb2n7snwx

HappyHarry

It depends on what his late wife's will said.

if she had left everything to him, and no PETs were made prior to her death, then his executors can claim two Nil Rate Bands.

If so, then the two £300,000 gifts and the pre-death £100,000 gift will use up most of the NRBs and so the recipients will not be liable for IHT.

If the house was solely in his wife's name and was left to him (rather than a trust), or if the house was in joint names, then there should also be two RNRBs available.

aroominyork

Her IHT (£325,000, or whatever it was in 2011) was used in gifts she made before bequeathing the residue to her husband. Regarding their home, I assume it was jointly owned.

getmore4less

The RNRB could not have been used in 2011 so will be available for transfer.
If there is enough value on the property, that should include any in a life interest trust that would reduce the total bill a bit.