Inheritance Tax - Gifts

Keep_pedalling

unkle said:

It's done in order;
So gifts first, as they were below £325k they simply use up £80k of the allowance so no taper relief I'm afraid. Leaving £245k of usual allowance plus (depending on date of death) £175k property allowance. There is no tax payable by the gift recipients in this instance as they form part of the tax free allowance.
So tax will be payable on £1.05m - £175k - £245k  = £630k and £252k tax payable @ 40%. So just shy of £800k to distribute.
This is a very misunderstood part of IHT, gifts will only receive taper relief for the amount gifted above £325k (or whatever the 0% band is).
HMRC may well question you using £3k per year in 15 & 16 from those gifts as more than £3k was given so they will argue he wasn't gifting £3k, but I'd put it on the form and see how you go but it's only saving you £2,400 at most.

You can't gift the £3k after death.

There is no problem using the annual allowance where a higher gift is given. 

getmore4less

They can carry over 2014 as well if it has not been used. 

Jeremy535897

unkle said:

It's done in order;
So gifts first, as they were below £325k they simply use up £80k of the allowance so no taper relief I'm afraid. Leaving £245k of usual allowance plus (depending on date of death) £175k property allowance. There is no tax payable by the gift recipients in this instance as they form part of the tax free allowance.
So tax will be payable on £1.05m - £175k - £245k  = £630k and £252k tax payable @ 40%. So just shy of £800k to distribute.
This is a very misunderstood part of IHT, gifts will only receive taper relief for the amount gifted above £325k (or whatever the 0% band is).
HMRC may well question you using £3k per year in 15 & 16 from those gifts as more than £3k was given so they will argue he wasn't gifting £3k, but I'd put it on the form and see how you go but it's only saving you £2,400 at most.

You can't gift the £3k after death.

The annual exemption of £3,000 may be allocated against a gift of any size, but of course the amount over £3,000 is not exempt.

Yellowbootson

Hi All, Whilst I dont have any advice for the OP and I do not think this is off topic, I have a question I hope you can help with, which I can't find an exact answer to on the forum or elseshere...

On IHT, I know there are multiple exemptions to IHT and just want to make sure our circumstances are legitimate and in hand, I know there is a £3,000 gift exemption per year of cash/assets which can be given away (which can not be combined with small gifts - this is made perfectly clear), I also see there is a seperate exemption called "Gifts from your surplus income" - I can not see anywhere that these can not be combined so long as good record keeping is kept and I find this slightly more unclear...

As an example;

Bob (living father) has £100,000 savings and gifts £3,000pa from these savings to Bill (Son) this is exempt from IHT (I think right?)

In addition -

Bob has a monthly income of £1,500 (not savings but current income from pensions, interest etc!) Bobs living costs are approx £1,250pm

Bob gives £250 per month as a regular payment to Bill (documented monthly) particularly as Bill takes care of a lot of his care needs - Is this also exempt from IHT? or to be blunt is the maximum limit £3,000 per year? In which case what is the purpose of the "Gifts from your surplus income"

Any help gratefully received as I think Bill is rather confused at the moment

[Deleted User]

• While the £250 is technically surplus income I am not sure that is a situation to which this concession is aimed - it is not aimed to completely eliminate any surplus. Take a wealthy pensioner who is in receipt of, say, £8000 per month and who is in the habit of giving lump sums at Christmas, birthdays etc. That is something that I would be more comfortable with.

Someone will come along and explain this a lot better than me but that is my basic understanding of the rule.

Jeremy535897

In theory Bob can give Bill £3,000 out of capital, and £250 a month out of income. On your figures, though, Bob is most unlikely to have surplus income when total income is only £18,000 a year (which would have to be after tax income), and when he is also reducing capital by £3,000 a year. You can study it here:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231 et seq

I should add that, on these figures, it is inconceivable that Bob will have an inheritance tax liability anyway, unless he had a £2 million mansion, and the council tax alone would mean he had nothing much left to make any gifts at all!

macman

i don't see any real problem with Bob gifting £3K pa out of annual post-tax income of £18K. That's about 16% of his net income. £15k left means that he still has more than 50% over and above the new state pension level of £9.1K. Bob might need to become Frugal Bob, but it's do-able.
I don't see how the annual £3K gifting is relevant, since that's coming out of capital?

Jeremy535897

macman said:

i don't see any real problem with Bob gifting £3K pa out of annual post-tax income of £18K. That's about 16% of his net income. £15k left means that he still has more than 50% over and above the new state pension level of £9.1K. Bob might need to become Frugal Bob, but it's do-able.
I don't see how the annual £3K gifting is relevant, since that's coming out of capital?

Some of Bob's income derives from that capital, so it will decrease after every gift of £3,000.

Yellowbootson

Hi Both, Thanks for coming back to me, Jeremy the link is really useful if not slightly baffling on first reading

So just so I have my head straight - and it might be a technical point as opposed to a question of his wealth and Im glad IHT may not even apply he doesnt have a 2mil mansion..

Bob can give Bill £3k pa from his savings capital - perfectly fine

Bob can ALSO make use of the surplus income by regularly gifting an evidenced surplus and this is also exempt (if IHT applicable) in addition to the 3k so the 2 exemptions are seperate?

as an FYI the example is just that, I dont think bobs income comes from the capital, the capital is savings, the income is pensions and the like. In addition to this Bob will continue to boost the value of his savings with his income so the capital will increase anyways in case he needs it before death. hence he is in surplus.

i.e. the 2 exemptions can be used in conjunction, as opposed to a max cap of £3k?

Capital (savings) - £3k from here

Additionally - regular payments from surplus income

Does that question make sense?

macman

Jeremy535897 said:

macman said:

i don't see any real problem with Bob gifting £3K pa out of annual post-tax income of £18K. That's about 16% of his net income. £15k left means that he still has more than 50% over and above the new state pension level of £9.1K. Bob might need to become Frugal Bob, but it's do-able.
I don't see how the annual £3K gifting is relevant, since that's coming out of capital?

Some of Bob's income derives from that capital, so it will decrease after every gift of £3,000.

True, but the OP's scenario is that Bob has the interest on £100K savings, plus pension income. At current rates, Bob is getting not much more than 1% on his savings, so £1K pa. Let's be generous and assume he has this in longer term fixed rate savings and is earning 2%, so £2k. Therefore the bulk of his income is from his pensions, which will not be impacted by gifting capital. 
Each annual gift of £3k will only reduce his savings income by £30 to £60.
So, one hopes, Frugal Bob will not become Hungry Bob.
OP: yes, there is no restriction on gifting annually up to £3K and also regularly out of surplus income as described.