Gifting excess income & capital expenditure rules

fcjf

My Dad recently asked me to look at his savings and investments which to his, and my surprise, totalled just over £400K, excluding his flat, and he’s keen to reduce his inheritance tax liability.

After working out his income from pensions and interest on savings (cash ISA’s) and deducting his outgoings he has an excess income of approx. £16,000 per year. I was made aware through a work colleague of the gifting of excess income allowance which he wants to start doing in addition to the £3000 gifting allowance.

I doubt that there is anything that can be done to reduce the £400k to below the Inheritance Tax threshold but his flat is leasehold with less than 50 years left on the lease. The flat with the lease as it is would probably be worth around £65 - 70k but around £95k with an extended lease.

If he was to arrange for a statutory lease extension could the cost (probably in the region of £20k) come out of his savings without impacting on the excess income he would have available for gifting?

Brie

Extending the lease is something that he is doing to increase the ultimate value of flat.  It has nothing to do with gifts.

Are you sure what his IHT liability would be?  There's a whole lot I don't understand about it but something about including the limit that a spouse might have had after they have died that might mean there is less liability than you might suspect.  

Keep_pedalling

What is your father’s marital status? Is he fit and healthy? Gifts from excess income stop your IHT liability from growing but does not reduce it.

Not extending the lease now will be leaving you a bit of a problem when it comes to to selling it in the future, its current value is only going to continue to decrease effectively reducing his IHT exemptions .

fcjf

My Mum passed 7 years ago so he's on his own. He's 86 and has no severe health issues but I wouldn't say he's fit and healthy.

The thinking was to reduce the inheritance tax liability now whilst increasing the value of his property and reducing the time it would take to sell the property in the future as the lease extension would be sorted, just wanted to check that it wouldn't impact the excess income allowance.

Ferro

fcjf said:

My Mum passed 7 years ago so he's on his own. He's 86 and has no severe health issues but I wouldn't say he's fit and healthy.

The thinking was to reduce the inheritance tax liability now whilst increasing the value of his property and reducing the time it would take to sell the property in the future as the lease extension would be sorted, just wanted to check that it wouldn't impact the excess income allowance.

Surely he would be able to utilise his wife’s unused allowance, eliminating any possibility of IHT?

https://www.gov.uk/government/publications/inheritance-tax-claim-to-transfer-unused-nil-rate-band-iht402

fcjf

Ferro said:

fcjf said:

My Mum passed 7 years ago so he's on his own. He's 86 and has no severe health issues but I wouldn't say he's fit and healthy.

The thinking was to reduce the inheritance tax liability now whilst increasing the value of his property and reducing the time it would take to sell the property in the future as the lease extension would be sorted, just wanted to check that it wouldn't impact the excess income allowance.

Surely he would be able to utilise his wife’s unused allowance, eliminating any possibility of IHT?

https://www.gov.uk/government/publications/inheritance-tax-claim-to-transfer-unused-nil-rate-band-iht402

I didn't even realise that was allowed so thank you for that and the link. 

I still think it may be worth extending the lease on his flat now or soon to avoid any future complications, especially if we now know there is no impact on gifting of excess income but he may not even want to do that now if he has an increased IH threshold.

Thanks again.

Keep_pedalling

fcjf said:

My Mum passed 7 years ago so he's on his own. He's 86 and has no severe health issues but I wouldn't say he's fit and healthy.

The thinking was to reduce the inheritance tax liability now whilst increasing the value of his property and reducing the time it would take to sell the property in the future as the lease extension would be sorted, just wanted to check that it wouldn't impact the excess income allowance.

Assuming he inherited your mother’s estate and they were married, then his estate will be well below the combined NRBs of £650k and the complexity of gifts from excess income is simply not worth the hassle. 

Hoenir

Could your father use some of his savings to enhance his quality of life? 

fcjf

Hoenir said:

Could your father use some of his savings to enhance his quality of life? 

I try every weekend I visit to get him to spend more money but he's an ex Miner from a poor family and it's in his DNA to be frugal and not spend money. Having said that he gets ready cooked meals and groceries delivered, has subscription TV and has the heating on all day. He has difficulty walking so cannot take holidays and when I take him out he doesn't want to eat out or even go for a drink any longer. He's content so not sure what else he can spend his money on. He despises the idea of assisted living but that ultimately be where his money goes.

fcjf

Keep_pedalling said:

fcjf said:

My Mum passed 7 years ago so he's on his own. He's 86 and has no severe health issues but I wouldn't say he's fit and healthy.

The thinking was to reduce the inheritance tax liability now whilst increasing the value of his property and reducing the time it would take to sell the property in the future as the lease extension would be sorted, just wanted to check that it wouldn't impact the excess income allowance.

Assuming he inherited your mother’s estate and they were married, then his estate will be well below the combined NRBs of £650k and the complexity of gifts from excess income is simply not worth the hassle. 

I'd tend to agree, knowing that inheritance tax isn't going to be an issue should ease any concerns and allow him to keep the money should he need it.

Hoenir

fcjf said:

Hoenir said:

Could your father use some of his savings to enhance his quality of life? 

I try every weekend I visit to get him to spend more money but he's an ex Miner from a poor family and it's in his DNA to be frugal and not spend money. Having said that he gets ready cooked meals and groceries delivered, has subscription TV and has the heating on all day. He has difficulty walking so cannot take holidays and when I take him out he doesn't want to eat out or even go for a drink any longer. He's content so not sure what else he can spend his money on. He despises the idea of assisted living but that ultimately be where his money goes.

At least there's funding availble for residential care should it be required.