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Inheritance tax newbie questions

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Speculator
Speculator Posts: 2,227 Forumite
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edited 18 December 2022 at 9:10PM in Deaths, funerals & probate
Trying to get my head around how inheritance tax works.

Man gives £7000 gift to daughter in 2020 (potentially exempt transfer)

Man dies 2022. Man leaves entire estate to wife in his will.

Daughter owes estate £4000 (failed PET) after annual exemption of £3,000

£4000 would be free of inheritance tax because there is no inheritance tax to pay if you leave everything to your spouse.

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  • user1977
    user1977 Posts: 14,812 Forumite
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    No other lifetime gifts? Then you can use at least one more £3000 annual exemption allowance between 2020 and the date of death, so at most £1000 to worry about.

    But even if we ignore that, daughter doesn't "owe estate £4000". The £4000 would be treated as part of the estate for inheritance tax purposes. But if everything else is subject to the spousal exemption, then the £4000 is nowhere near big enough for inheritance tax to kick in. So it's irrelevant.
  • Keep_pedalling
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    The only time anyone receiving a gift would be responsible for paying IHT would be if someone had given so much money away that there was not enough money left in the estate to meet the tax due. In your example if someone had only made a single gift of £7000 only £1000 would be treated as a PET, the rest would be covered by two years annual exemptions.
  • Speculator
    Speculator Posts: 2,227 Forumite
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    ok, what about this example.

    Man gives £7000 gift to daughter in 2020 (potentially exempt transfer)

    Man dies 2022. Man leaves entire estate to wife in his will including £400K house

    £1000 failed PET  after annual exemptions of 2 x £3,000

    £1000 now treated as part of the estate. Is tax payable on the £1000?
  • Keep_pedalling
    Keep_pedalling Posts: 17,230 Forumite
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    edited 18 December 2022 at 9:34PM
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    ok, what about this example.

    Man gives £7000 gift to daughter in 2020 (potentially exempt transfer)

    Man dies 2022. Man leaves entire estate to wife in his will including £400K house

    £1000 failed PET  after annual exemptions of 2 x £3,000

    £1000 now treated as part of the estate. Is tax payable on the £1000?
    No, IHT would only be payable if the failed PET exceeded the nil rate band (£325k), anything going to a spouse is exempt.
  • Speculator
    Speculator Posts: 2,227 Forumite
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    edited 18 December 2022 at 10:06PM
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    ok, what about this example.

    Man gives £7000 gift to daughter in 2020 (potentially exempt transfer)

    Man dies 2022. Man leaves entire estate to wife in his will including £400K house

    £1000 failed PET  after annual exemptions of 2 x £3,000

    £1000 now treated as part of the estate. Is tax payable on the £1000?
    No, IHT would only be payable if the failed PET exceeded the nil rate band (£325k), anything going to a spouse is exempt.
    Would this be the same for regular transfers from surplus income which the inland revenue deem to fail the test?

    ie, man transfers £1000 monthly for a year to daughter from his pension. Tax man deems it excessive and adds the £12000 to the estate.

    Man dies and leaves everything to spouse including £400K house. No tax to pay on the £12000?
  • macman
    macman Posts: 53,098 Forumite
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    edited 18 December 2022 at 10:45PM
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    The test is not whether it's 'excessive', but whether the monthly £1k is being gifted out of capital or surplus income.
    Elon Musk could afford to gift £10K or more monthly from surplus income, Mr Average Joe could not.
    No free lunch, and no free laptop ;)
  • user1977
    user1977 Posts: 14,812 Forumite
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    There's still going to be no IHT payable until the total not going to the spouse (including any failed PETs) reaches the nil rate band.

    It might be easier if you explained why you're asking rather than coming up with a bunch of contradictory hypothetical examples.
  • Speculator
    Speculator Posts: 2,227 Forumite
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    edited 18 December 2022 at 11:36PM
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    user1977 said:
    There's still going to be no IHT payable until the total not going to the spouse (including any failed PETs) reaches the nil rate band.

    It might be easier if you explained why you're asking rather than coming up with a bunch of contradictory hypothetical examples.
    Dad and mum lived with me in my house for 22 years, rent free.

    Dad now only have about a week to live.

    During the years, (his state pension is £1000) and he transferred around £600 (from their joint account) to my account per month to pay for utilities etc and took out £400 cash at the atm to give to mum for shopping. Sometimes, he transferred the full £1000 to my account and I withdrew £400 in cash from my account for him.

    They never go out so never need much money. They only needed money for food shopping for themselves and I paid for everything else. (ie new boiler last week for £2800)

    Also, mums state pension has always been combined with dads until about 18 months ago. Now she has her separate state pension going to her own account. (around £67 per week). (think she is due an increase when dad dies)

    In his will he is leaving everything to mum. (no property in the UK but an ancestral  house in HK worth approx £400k)

    I am worried about the  monthly transfers (all from income)  becoming taxable
  • user1977
    user1977 Posts: 14,812 Forumite
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    edited 18 December 2022 at 11:36PM
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    So are these even "gifts", or just reimbursing the costs for their accommodation?

    Like I said though, they'd have to be much more substantial before any tax becomes due.
  • Speculator
    Speculator Posts: 2,227 Forumite
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    edited 19 December 2022 at 12:02AM
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    Regarding the  nil band rate (£325K).

    If spouse gets property worth £400K and £40K goes to cousin in will.

    Any tax payable on the £40K?

    Does the £400K property use up the £325K allowance so £16,000 tax payable on the £40K or no tax payable?




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