Reducing Inheritance tax by gifting money early

patchyX2

My dad has floated the idea of gifting me a large sum of cash now, rather than when he kicks the bucket. The reason behind it is to reduce the amount of his estate that will be liable for IHT (as he'll be over the threshold as it stands).

He doesn't need the capital, although he does need the interest that it generates, so he'd essentially transfer me the cash, and each month I'd transfer the interest it generates back to him.

What are the potential pitfalls with doing this?

I'm aware of the 7 year rule, and also (depending on where the money is held) I will be liable to pay tax on the interest.

I've also recently read about deprivation of assets when it comes to paying for care. This seems like a grey area to me as he doesn't need care now, and (fingers crossed) won't need any any time soon, but it sounds like they can look as far back in time as they like to see if he's moved money around. If he just gave me the money with a letter saying it was a gift for a house deposit, and I spent it all on a house, then I think that would be a clear cut case - but the fact I keep the money and am paying him the interest it generates, makes this a bit of a sticking point.

Aside from the obvious issue of trust, are there any other implications for either my dad or myself with this approach? 

Keep_pedalling

That arrangement would be seen as a gift with reservation of benefit so the seven year rule does not apply and the gift does not fall out of his estate.

Trust is not the only issue his income could be lost if you die before him, get divorced or go bankrupt, so it would be foolish of him to do this. 

You say his estate will be subject to IHT but can we first off check that it is. What is his marital status? Does he own his own home? What is his net worth?

Keep_pedalling

The other downside is that you could be paying a lot more tax on the interest than he is.

Albermarle

PledgeX2 said:

My dad has floated the idea of gifting me a large sum of cash now, rather than when he kicks the bucket. The reason behind it is to reduce the amount of his estate that will be liable for IHT (as he'll be over the threshold as it stands). As above, some figures would be useful as many people think they will be liable for IHT when actually they will not.

He doesn't need the capital, although he does need the interest that it generates, so he'd essentially transfer me the cash, and each month I'd transfer the interest it generates back to him.

What are the potential pitfalls with doing this? Then it is not a straight gift.

I'm aware of the 7 year rule, and also (depending on where the money is held) I will be liable to pay tax on the interest.

I've also recently read about deprivation of assets when it comes to paying for care. This seems like a grey area to me as he doesn't need care now, and (fingers crossed) won't need any any time soon, but it sounds like they can look as far back in time as they like to see if he's moved money around. If he just gave me the money with a letter saying it was a gift for a house deposit, and I spent it all on a house, then I think that would be a clear cut case - but the fact I keep the money and am paying him the interest it generates, makes this a bit of a sticking point. The fact that there is no indication he will need care in the near future does mean that deprivation of assets is less of an obvious issue, but the LA can still take a view on it.
Presumably though if he has potential IHT issues, then even if he leaves you a large gift, there should still be plenty left to pay for care? Deprivation of assets is only an issue if you want the council to pay for care. If you pay for it all privately, then the council is not interested in your other financial arrangements.

Aside from the obvious issue of trust, are there any other implications for either my dad or myself with this approach? 

Comments in bold.

Brie

Sounds like he doesn't have sufficient income to live on if he needs you to pay him the interest the capital would generate.  And there is, as already mentioned, the issue of you paying income tax on the interest the capital would generate while you had it.  

As for DoA - yes only an issue of the council needs to pay for any of his care.  And no it wouldn't matter if you were holding the capital or used it to buy a house.  They could tell you to pay it back either way.  And perhaps you'll need to pay it back anyways if you want dad to be living somewhere half decent should he need to move into a full time care setting.  Obviously if he owns his home and needs to go into a care home the home could be sold and pay for things initially at least.  Depending on location a "decent" care home might be easily £3k a week or £6k a week.  Also depends on your/his definition of "decent".  

zagfles

Far too complicated. Why not just keep back the money he thinks he needs. Or possibly buy an annuity paying the income he needs, and gift the rest.

Then it'd be a clean no-strings gift, and IHT would not be an issue assuming he lives for 7 years and nor would DoA assuming he's fit and healthy and can't foresee a need for care, see Deprivation of assets in social care (ageuk.org.uk)