Tax on gifts

spdavies

Hi All,
My Dad has very kindly offered to share some of his savings with me, to help with my house renovations. He is looking to give me £10k from his savings (along with £10k to my sister).

I've read all the inheritance tax guidelines but remain a little confused and clearly do not want my Dad to incur any tax bills as a result of his kindness.

He is 80 now but in good health so hopefully the 7yr bracket will not apply, but who knows!

He owns his house (circa £250k) and has a pension income plus savings of circa £250k so his total estate might fall above the £500k (IHT + Residents allowance).

All advice welcome please on the best approach.

Regards

Dazed_and_C0nfused

Where have you read your dad could be taxed on gifts he makes?

spdavies

How Inheritance Tax works: thresholds, rules and allowances: Rules on giving gifts - GOV.UK (www.gov.uk)

Above link including the section that talks about:  (obviously happy to be told i am wrong).

Using allowances to give tax free gifts

Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

Annual exemption

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.

You can carry any unused annual exemption forward to the next tax year - but only for one tax year.

The tax year runs from 6 April to 5 April the following year.

Dazed_and_C0nfused

But your dad couldn't pay inheritance tax could he.

I've read all the inheritance tax guidelines but remain a little confused and clearly do not want my Dad to incur any tax bills as a result of his kindness.

spdavies

Sorry if i've not been clear. 
- Intention is for my Dad to give a me and sister a £10k gift.
- Whilst there is no tax on gifts, i worry that it may fall into the 7year rule if he was to sadly pass in that timeframe and that there may be some subsequent tax obligation. I take your point that this will not be his problem and will just be subsequently deducted from his estate (on 7yr sliding scale).

I am basically asking what the best way is for him to give me and my sister £10k whilst minimising any potential tax implications (gift, capital or IHT).

Thanks

Albermarle

spdavies said:

Sorry if i've not been clear. 
- Intention is for my Dad to give a me and sister a £10k gift.
- Whilst there is no tax on gifts, i worry that it may fall into the 7year rule if he was to sadly pass in that timeframe and that there may be some subsequent tax obligation. I take your point that this will not be his problem and will just be subsequently deducted from his estate (on 7yr sliding scale).

I am basically asking what the best way is for him to give me and my sister £10k whilst minimising any potential tax implications (gift, capital or IHT).

Thanks

The issue is that if he died within 7 years of making a large gift, the gift would still be counted as part of his estate.
However it would not be a worse position than if he had not made the gift. You can not actually incur more IHT by giving gifts.

You can give more modest gifts each year that are exempt and will not be counted back in the estate, whenever he dies.
That is £3K per year + some smaller amounts for birthdays etc. If the £3K has not been given one year it can be rolled over.
So this tax year he can give away £6K + some birthday money ( £250??) and next tax year £3K + £250? and all will be ignored for IHT calculation purposes when he dies.

Keep_pedalling

There is no down side to him gifting you each £10k. The worse that can happen is his estate pays the same IHT as it would have done if he never made the gift. 

Is your father a widower? If he is then his estate will have any unused NRB and RNRB from his wife’s estate. If not he should perhaps consider actually making larger gifts to bring his net worth below £500k.  

spdavies

Hi - Yes he is a widower and thanks. Please can you elaborate on NRB and RNRB?

So in summary if he gives the £20k then:
- Scenario 1 - he lives longer than 7 yrs so no obligation
- Scenario 2 - he dies in 7yr window. Tax will then be paid either-way, through the estate and so no negatives.

Suggestion - seek advice about further payments to reduce his net worth below £500k and consider wider allowances from NRB and RNRB.

Is that about right???

Keep_pedalling

spdavies said:

Hi - Yes he is a widower and thanks. Please can you elaborate on NRB and RNRB?

So in summary if he gives the £20k then:
- Scenario 1 - he lives longer than 7 yrs so no obligation
- Scenario 2 - he dies in 7yr window. Tax will then be paid either-way, through the estate and so no negatives.

Suggestion - seek advice about further payments to reduce his net worth below £500k and consider wider allowances from NRB and RNRB.

Is that about right???

If you father inherited everything from your mother then his estate can claim her full unused transferable nil rate band (NRB) and  her transferable residential nil rate band (RNRB) as well, giving a potential exemption of £1M. It is therefore highly unlikely that his estate will ever be subject to IHT so he does not need to reduce his net worth below £500k.

When the time comes to dealing with his estate it is better to use any transferable NRB rather than his RNRB as that avoids the need to do an IHT return. 

Jeremy535897

Albermarle said:

spdavies said:

Sorry if i've not been clear. 
- Intention is for my Dad to give a me and sister a £10k gift.
- Whilst there is no tax on gifts, i worry that it may fall into the 7year rule if he was to sadly pass in that timeframe and that there may be some subsequent tax obligation. I take your point that this will not be his problem and will just be subsequently deducted from his estate (on 7yr sliding scale).

I am basically asking what the best way is for him to give me and my sister £10k whilst minimising any potential tax implications (gift, capital or IHT).

Thanks

The issue is that if he died within 7 years of making a large gift, the gift would still be counted as part of his estate.
However it would not be a worse position than if he had not made the gift. You can not actually incur more IHT by giving gifts.

You can give more modest gifts each year that are exempt and will not be counted back in the estate, whenever he dies.
That is £3K per year + some smaller amounts for birthdays etc. If the £3K has not been given one year it can be rolled over.
So this tax year he can give away £6K + some birthday money ( £250??) and next tax year £3K + £250? and all will be ignored for IHT calculation purposes when he dies.

You cannot use the annual exemption and small gifts exemption in respect of gifts to the same person.
The simple fact is that father is never going to make gifts that are sufficient in size to make any difference. If he dies within 7 years of making them, then inheritance tax on the estate will be calculated as if the gifts had not been made (although available annual exemptions will be taken into account). I assume that OP's parents were divorced, so there are no transferable nil rate bands?

Keep_pedalling

Jeremy535897 said:

Albermarle said:

spdavies said:

Sorry if i've not been clear. 
- Intention is for my Dad to give a me and sister a £10k gift.
- Whilst there is no tax on gifts, i worry that it may fall into the 7year rule if he was to sadly pass in that timeframe and that there may be some subsequent tax obligation. I take your point that this will not be his problem and will just be subsequently deducted from his estate (on 7yr sliding scale).

I am basically asking what the best way is for him to give me and my sister £10k whilst minimising any potential tax implications (gift, capital or IHT).

Thanks

The issue is that if he died within 7 years of making a large gift, the gift would still be counted as part of his estate.
However it would not be a worse position than if he had not made the gift. You can not actually incur more IHT by giving gifts.

You can give more modest gifts each year that are exempt and will not be counted back in the estate, whenever he dies.
That is £3K per year + some smaller amounts for birthdays etc. If the £3K has not been given one year it can be rolled over.
So this tax year he can give away £6K + some birthday money ( £250??) and next tax year £3K + £250? and all will be ignored for IHT calculation purposes when he dies.

You cannot use the annual exemption and small gifts exemption in respect of gifts to the same person.
The simple fact is that father is never going to make gifts that are sufficient in size to make any difference. If he dies within 7 years of making them, then inheritance tax on the estate will be calculated as if the gifts had not been made (although available annual exemptions will be taken into account). I assume that OP's parents were divorced, so there are no transferable nil rate bands?

The OPs father is a widower.