General question about spouse exemption & gifting

Inigo_Montoya

Hello

I suspect this question might have been asked before but here goes & hopefully someone with "expert" knowledge can answer definitively 

Can a spouse who has inherited most of the Estate tax free due to the spouse exemption then relatively soon after receiving that inheritance gift most of it to her children ? 

Or would HMRC consider this a form of tax evasion ? i.e. if the money had been inherited directly by the children inheritance tax would have been payable

Alternatively would HMRC consider this acceptable due to the tax rules on gifting i.e. tax will be payable later on these gifts on the death of the spouse unless they survive at least another 7 years

thanks in advance for any useful replies

Marcon

Inigo_Montoya said:

Hello

I suspect this question might have been asked before but here goes & hopefully someone with "expert" knowledge can answer definitively 

Can a spouse who has inherited most of the Estate tax free due to the spouse exemption then relatively soon after receiving that inheritance gift most of it to her children ? 

Yes, although whether it is wise to do so is another matter!

Inigo_Montoya said:

Or would HMRC consider this a form of tax evasion ? i.e. if the money had been inherited directly by the children inheritance tax would have been payable

No.

Inigo_Montoya said:

Alternatively would HMRC consider this acceptable due to the tax rules on gifting i.e. tax will be payable later on these gifts on the death of the spouse unless they survive at least another 7 years

thanks in advance for any useful replies

It isn't a matter of HMRC considering it 'acceptable due to the tax rules on gifting' - they can't stop people giving away assets they own.

Tax may or may not be payable even if the person giving them away dies within 7 years - it depends how much the spouse's estate will be worth and what it consists of/to whom it is being left. If the first person to die doesn't use up the whole of their nil rate band (currently £325K), the surviving spouse 'inherits' whatever hasn't been used; ditto if the slice relating to property isn't used by the first spouse to die and the property is left to children/grandchildren. See https://www.litrg.org.uk/tax-guides/bereavement/what-reliefs-and-exemptions-are-there-inheritance-tax and https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

There are other considerations, though. Giving away a lot of capital could be seen as deprivation of assets if the surviving spouse later needs to go into residential care and hopes the local authority will help with the funding.

Keep_pedalling

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

Marcon

Keep_pedalling said:

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

There are always considerations other than tax (deprivation of assets being just one). Sometimes people can be so focussed on tax that they overlook 'softer' issues such as family dynamics, which can be more than a little unpredictable.

Keep_pedalling

Marcon said:

Keep_pedalling said:

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

There are always considerations other than tax (deprivation of assets being just one). Sometimes people can be so focussed on tax that they overlook 'softer' issues such as family dynamics, which can be more than a little unpredictable.

True, although DOA should not be an issue where a couple are well into IHT territory. We have reduced out potential IHT liability by gifting, but have not gone the whole hog as we have factored in significant sums for best possible care costs (live in careers preferable)  just in case. If that is not used then our children get 60% and the tax man 40%. As you say some things are more important than saving tax.

Inigo_Montoya

Keep_pedalling said:

Marcon said:

Keep_pedalling said:

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

There are always considerations other than tax (deprivation of assets being just one). Sometimes people can be so focussed on tax that they overlook 'softer' issues such as family dynamics, which can be more than a little unpredictable.

True, although DOA should not be an issue where a couple are well into IHT territory. We have reduced out potential IHT liability by gifting, but have not gone the whole hog as we have factored in significant sums for best possible care costs (live in careers preferable)  just in case. If that is not used then our children get 60% and the tax man 40%. As you say some things are more important than saving tax.

Also I assume the new £86.000 care cap from October 2023 is relevant to this issue ?

In my original question I should have clarified that any money that might be gifted would be money that would otherwise later be taxable & not covered by any exemptions or reliefs such as the nil rate band or residence nil rate band (plus any transferred ones that were unused)

So there would still be a substantial sum left in the spouses name after the gifts

However my main question has been answered i.e. that a spouse gifting a large sum to children shortly after inheriting it tax free due to spouse exemption is not considered tax evasion by HMRC

Keep_pedalling

Inigo_Montoya said:

Keep_pedalling said:

Marcon said:

Keep_pedalling said:

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

There are always considerations other than tax (deprivation of assets being just one). Sometimes people can be so focussed on tax that they overlook 'softer' issues such as family dynamics, which can be more than a little unpredictable.

True, although DOA should not be an issue where a couple are well into IHT territory. We have reduced out potential IHT liability by gifting, but have not gone the whole hog as we have factored in significant sums for best possible care costs (live in careers preferable)  just in case. If that is not used then our children get 60% and the tax man 40%. As you say some things are more important than saving tax.

Also I assume the new £86.000 care cap from October 2023 is relevant to this issue ?

I am not so sure, as I understand it the cap does not include the “hotel” part of the costs and if like me you want total control over who where and when, then you are going to still be 100% self funding. If you choose to pay live in careers or a care home that dose not take LA funded residents then you are going to have to pay everything.

SeniorSam

If the first death was within two years, then the first Will can be changed so that the gifts were made by the first to die to the children and not to the spouse. This is far better and any solicitor would be able to help you complete the necessary papers.

Keep_pedalling

SeniorSam said:

If the first death was within two years, then the first Will can be changed so that the gifts were made by the fist to die to the children and not to the spouse. This is far better and any solicitor would be able to help you complete the necessary papers.

Surely where spouses are concerned, it is better to make a gift. A deed of variation would use up some or all of the deceased spouse’s NRB which will no longer be transferable, so would result in more IHT being payable if the survivor lived another 7 years or more.

Inigo_Montoya

SeniorSam said:

If the first death was within two years, then the first Will can be changed so that the gifts were made by the fist to die to the children and not to the spouse. This is far better and any solicitor would be able to help you complete the necessary papers.

In the scenario I was considering the nil rate band of the first deceased has *already* been "used up" by monies given to the children & it is only the residual estate that has been given to the surviving spouse

therefore any further gifting in the first Will via a Deed of Variation would be liable to IHT so does not make financial sense

Also apologies if my terminology is incorrect as i am coming at this as just a layperson who has done some reading

lisyloo

Inigo_Montoya said:

Keep_pedalling said:o

Marcon said:

Keep_pedalling said:

If the inheritance puts the survivors estate into IHT territory, then gifting is probably a wise thing to do. The worst that can happen is that they die before the 7 years is up, in which case it won’t save any IHT but won’t add any additional taxes either. 

There are always considerations other than tax (deprivation of assets being just one). Sometimes people can be so focussed on tax that they overlook 'softer' issues such as family dynamics, which can be more than a little unpredictable.

True, although DOA should not be an issue where a couple are well into IHT territory. We have reduced out potential IHT liability by gifting, but have not gone the whole hog as we have factored in significant sums for best possible care costs (live in careers preferable)  just in case. If that is not used then our children get 60% and the tax man 40%. As you say some things are more important than saving tax.

Also I assume the new £86.000 care cap from October 2023 is relevant to this issue ?

In my original question I should have clarified that any money that might be gifted would be money that would otherwise later be taxable & not covered by any exemptions or reliefs such as the nil rate band or residence nil rate band (plus any transferred ones that were unused)

So there would still be a substantial sum left in the spouses name after the gifts

However my main question has been answered i.e. that a spouse gifting a large sum to children shortly after inheriting it tax free due to spouse exemption is not considered tax evasion by HMRC

The care cap is only relevant if you’re happy to live within the LA budget.
we visited about 20 homes in the Bristol/bath area and many of the places within LA budget fell into the “over my dead body” category.
by that I mean my SIL was talking about giving up her job/career so her mother did not end up in “over my dead body grove”.
It amazes me that people still believe the state safety net is a good idea for either themselves or their parents.
and BTW their no guarantee a married couple will end up together - they tried to split up my MiL & FIL to save a few quid when there was 2 places in the same home - completely heartless to save a few quid.

£86k is also the personal care part, not nursing or the “hotel” (board & lodging) costs.

for very comfortably off people it might be worth looking at an annuity for care costs