Inheritance taper question

Ciprico

I hope someone can give a pointer on this

If a father made a gift to his son of say £40k and died 5 years later...

Is the taper applied to the gift... 

Or is the 40k deducted first from the deceased father's iht allowance, so no iht is due but the iht free threshold is reduced to 325-40

In this example the father had left exactly 325k to his children in his will. Not counting the earlier gifts so if I read the .gov example correctly the taper is not applicable.... 

Jeremy535897

Taper relief only applies if, as a result of the death of the donor within seven years, tax becomes payable on the gift itself. This only happens for PETs if the cumulative amount of them in the seven years before death exceeds the donor's nil rate band.

Basically, you can't taper a nil liability.

Ciprico

Thanks Jeremy. This is what I thought I read. 

So in the majority of cases for gifts amounting to less than £325k over the seven year period the taper isn't applicable (assuming the estate is over 325k) as the gifts mop up the iht free allowance first, pushing more estate into tax... 

Ouch!

Keep_pedalling

Ciprico said:

Thanks Jeremy. This is what I thought I read. 

So in the majority of cases for gifts amounting to less than £325k over the seven year period the taper isn't applicable (assuming the estate is over 325k) as the gifts mop up the iht free allowance first, pushing more estate into tax... 

Ouch!

It does not put more of the estate into tax. For example if my estate is worth £750k and I have my full NRB and residential nil rate bands available my estate will pay 40% tax on £250k (£100k). If I give £250k away but die within 7 years the tax burden will be slightly less, because of my £3000 annual exemption so £97,600 IHT.

Gifting never costs your estate more tax, although if the beneficiaries of the gift and your will are different, the beneficiaries of your will will be the ones impacted by IHT as the person receiving the gift is not liable for any of it.

If you are in good health the risk can be easily be mitigated by taking out term life insurance to cover IHT on large gifts.

Jeremy535897

Not relevant to the post, but actually there are many cases where a lifetime gift can increase tax. The most obvious example is a gift with reservation.

Keep_pedalling

Jeremy535897 said:

Not relevant to the post, but actually there are many cases where a lifetime gift can increase tax. The most obvious example is a gift with reservation.

I stand corrected, never should be hardly ever. Apart from a GWR the only other examples I can think of if gifting a gift back within 7 years so the same money could count twice.

Ciprico

Is the 3k pa gift allowance accumulative or use it or lose it... 

[Deleted User]

Ciprico said:

Is the 3k pa gift allowance accumulative or use it or lose it... 

Use it or lose it - although you can also use the previous years £3000 allowance if not exhausted.

Jeremy535897

Keep_pedalling said:

Jeremy535897 said:

Not relevant to the post, but actually there are many cases where a lifetime gift can increase tax. The most obvious example is a gift with reservation.

I stand corrected, never should be hardly ever. Apart from a GWR the only other examples I can think of if gifting a gift back within 7 years so the same money could count twice.

Giving an asset that then depreciates in value is one example, but also there are gifts that increase other tax liabilities (like losing the main residence exemption, falling foul of the POAT rules, creating income tax liabilities on rent, additional SDLT rate being payable etc).