Inheritance tax, wedding gift and other things

TF03

Hi everyone,

We are coming into a situation and just looking for some guidance. This is more for me being pre-armed with some info and questions to ask a financial adviser that we are booking in to see next week. 

My future parents in law have both unfortunately within 3 months of each other been diagnosed with stage 4 cancer. Obviously it’s hit us all hard but mostly my other half having to come to terms with losing both parents in the next 12-24 months.

Unfortunately, they left it too late to start gifting away their money, bits of their estate etc to take advantage of the 7 year rule. As is stands, the rough value of the estate to be split between my OH and her brother is £1.4-2 million. That’s including the house, savings, valuable items etc.

So we are faced with quite a hefty bit of inheritance tax. We are looking at ways they can start moving cash to their children in a tax efficient way. 

Any thoughts on the points below would be muchly appreciated!

• £3K annual allowance: they have already been using this and will continue to do so, with hopefully them making it to the next tax year to lose another £6K. 

• Combined tax free allowance of £1million: I believe I am right in saying that with the combined £325k x 2 and then £175 residence nil-band x 2 that they can leave up to £1million inheritance tax free? As long as the surviving parent leaves the house to the children?

• Wedding gift: We have decided to re-plan our wedding and bring it forward to happen in the next few months so that they can both be there. Am I right in saying, that both parents can gift £5k to my OH, and then £1k each to “another person” aka myself inheritance tax free, thus losing £12k straight away? Can they give us the money as a lump or is it better for them to pay suppliers direct?

• Small gift allowance: I'm right in saying they can give £250 a year to as many people as they like who haven't had the £3k allowance. I assume it's one £250 per person? 

• Gifts from surplus income: They both receive a state and private pension. They have always lived very frugally so they only use a small amount of their income each month. So I'm right in saying that they could give some of this surplus income to both children to fund certain things such as paying a mortgage or child care for example as long as it doesn't affect their lifestyle? This one seems like a bit of a grey area to me? How is that proved? Is it better to pay whatever it is directly so it's easier to evidence or can they just do a regular bank transfer and put a reference on it of "mortgage money" for example?

• Credit card spending: If they for example buy laptop on a credit card for my OH (as she needs a new one for work) and then pay off the credit card in full like they do anyway each month, would the tax man want to see the credit card statement? I ask because that seems like a potential way that they could spend from their estate by paying off a credit card balance each month and then their bank statements would just say "credit card payment". 

• Joint accounts: they did mention about potentially opening a joint account with the children so that when they pass, the money in that account passes to the other named person on the account via right of survivorship. I'm guessing that whilst that will remove the need to go through probate to gain access to their accounts it won't have any affect of avoiding IHT? That the tax man would say well "x" amount of that was put in their by the parent so that is still part of the estate? And that actually, when of them goes first that the money in that account would then already be classed as being "inherited" and as such would then come out of that parents IHT allowance of £325k?
  

Sorry for all the questions. Obviously this an awful time for us but just trying to get our heads around a few things before we go and see the financial adviser next week. 

Keep_pedalling

TF03 said:

Hi everyone,

We are coming into a situation and just looking for some guidance. This is more for me being pre-armed with some info and questions to ask a financial adviser that we are booking in to see next week. 

My future parents in law have both unfortunately within 3 months of each other been diagnosed with stage 4 cancer. Obviously it’s hit us all hard but mostly my other half having to come to terms with losing both parents in the next 12-24 months.

Unfortunately, they left it too late to start gifting away their money, bits of their estate etc to take advantage of the 7 year rule. As is stands, the rough value of the estate to be split between my OH and her brother is £1.4-2 million. That’s including the house, savings, valuable items etc.

So we are faced with quite a hefty bit of inheritance tax. We are looking at ways they can start moving cash to their children in a tax efficient way. 

Any thoughts on the points below would be muchly appreciated!

• £3K annual allowance: they have already been using this and will continue to do so, with hopefully them making it to the next tax year to lose another £6K. 

• Combined tax free allowance of £1million: I believe I am right in saying that with the combined £325k x 2 and then £175 residence nil-band x 2 that they can leave up to £1million inheritance tax free? As long as the surviving parent leaves the house to the children?

£1M is correct unless there are major changes in the budget that is about to hit us. They don’t specifically have to name the house in their will for the executors to be able to claim the allowance.

• Wedding gift: We have decided to re-plan our wedding and bring it forward to happen in the next few months so that they can both be there. Am I right in saying, that both parents can gift £5k to my OH, and then £1k each to “another person” aka myself inheritance tax free, thus losing £12k straight away? Can they give us the money as a lump or is it better for them to pay suppliers direct?

They can both gift £5k now in a lump sum but not the extra £1k that allowance is to cover a wedding gift to a minor relative or friend.

• Small gift allowance: I'm right in saying they can give £250 a year to as many people as they like who haven't had the £3k allowance. I assume it's one £250 per person? 

Yes.

• Gifts from surplus income: They both receive a state and private pension. They have always lived very frugally so they only use a small amount of their income each month. So I'm right in saying that they could give some of this surplus income to both children to fund certain things such as paying a mortgage or child care for example as long as it doesn't affect their lifestyle? This one seems like a bit of a grey area to me? How is that proved? Is it better to pay whatever it is directly so it's easier to evidence or can they just do a regular bank transfer and put a reference on it of "mortgage money" for example?

Yes they can do this but, if they are able, they should prioritise spending on them selves to do some of the things they have always wanted to do, to make any adaptions they might need to do to make life as comfortable as possible in the time they have left.

• Credit card spending: If they for example buy laptop on a credit card for my OH (as she needs a new one for work) and then pay off the credit card in full like they do anyway each month, would the tax man want to see the credit card statement? I ask because that seems like a potential way that they could spend from their estate by paying off a credit card balance each month and then their bank statements would just say "credit card payment". 

That is still a gift that needs to be declared, they should not try to put their executors in a position where they are committing tax avoidance.  

• Joint accounts: they did mention about potentially opening a joint account with the children so that when they pass, the money in that account passes to the other named person on the account via right of survivorship. I'm guessing that whilst that will remove the need to go through probate to gain access to their accounts it won't have any affect of avoiding IHT? That the tax man would say well "x" amount of that was put in their by the parent so that is still part of the estate? And that actually, when of them goes first that the money in that account would then already be classed as being "inherited" and as such would then come out of that parents IHT allowance of £325k?
  

Pointless exercise, as you have already surmised it all remains within the estate.

Sorry for all the questions. Obviously this an awful time for us but just trying to get our heads around a few things before we go and see the financial adviser next week. 

With both likely to die within 2 years there is very little that can be done at this late stage to reduce IHT other than that mentioned above. An IFA might suggest investing in AIM shares which only have to be held for two years to be exempt but these are high risk and your in laws are both not likely to live that long. It is also highly likely the budget will remove tax break in the budget. 

In their shoes my priority here would be to make sure my will was up to date and that I have lasting powers of attorney for both welfare and finance in place, if that is not the case already then seeing a solicitor is more important than seeing an IFA.

vacheron

So sorry for your awful news.

I'm not an expert, but if your partners parents are under 75 they may be able to put some more of their available savings into a pension which would then be passed, IHT free to their beneficiaries if they die before 75.

Those more knowledgable may be able to confirm or deny this, and these rules could be changed in this months budget, but may not be able to come into effect for some time. So could be worth looking in to. 

More_complicated_than_that

TF03 said:

Hi everyone,

We are coming into a situation and just looking for some guidance. This is more for me being pre-armed with some info and questions to ask a financial adviser that we are booking in to see next week. 

My future parents in law have both unfortunately within 3 months of each other been diagnosed with stage 4 cancer. Obviously it’s hit us all hard but mostly my other half having to come to terms with losing both parents in the next 12-24 months.

Unfortunately, they left it too late to start gifting away their money, bits of their estate etc to take advantage of the 7 year rule. As is stands, the rough value of the estate to be split between my OH and her brother is £1.4-2 million. That’s including the house, savings, valuable items etc.

So we are faced with quite a hefty bit of inheritance tax. We are looking at ways they can start moving cash to their children in a tax efficient way. 

Any thoughts on the points below would be muchly appreciated!

• £3K annual allowance: they have already been using this and will continue to do so, with hopefully them making it to the next tax year to lose another £6K. 

• Combined tax free allowance of £1million: I believe I am right in saying that with the combined £325k x 2 and then £175 residence nil-band x 2 that they can leave up to £1million inheritance tax free? As long as the surviving parent leaves the house to the children?

• Wedding gift: We have decided to re-plan our wedding and bring it forward to happen in the next few months so that they can both be there. Am I right in saying, that both parents can gift £5k to my OH, and then £1k each to “another person” aka myself inheritance tax free, thus losing £12k straight away? Can they give us the money as a lump or is it better for them to pay suppliers direct?

• Small gift allowance: I'm right in saying they can give £250 a year to as many people as they like who haven't had the £3k allowance. I assume it's one £250 per person? 

• Gifts from surplus income: They both receive a state and private pension. They have always lived very frugally so they only use a small amount of their income each month. So I'm right in saying that they could give some of this surplus income to both children to fund certain things such as paying a mortgage or child care for example as long as it doesn't affect their lifestyle? This one seems like a bit of a grey area to me? How is that proved? Is it better to pay whatever it is directly so it's easier to evidence or can they just do a regular bank transfer and put a reference on it of "mortgage money" for example?

• Credit card spending: If they for example buy laptop on a credit card for my OH (as she needs a new one for work) and then pay off the credit card in full like they do anyway each month, would the tax man want to see the credit card statement? I ask because that seems like a potential way that they could spend from their estate by paying off a credit card balance each month and then their bank statements would just say "credit card payment". 

• Joint accounts: they did mention about potentially opening a joint account with the children so that when they pass, the money in that account passes to the other named person on the account via right of survivorship. I'm guessing that whilst that will remove the need to go through probate to gain access to their accounts it won't have any affect of avoiding IHT? That the tax man would say well "x" amount of that was put in their by the parent so that is still part of the estate? And that actually, when of them goes first that the money in that account would then already be classed as being "inherited" and as such would then come out of that parents IHT allowance of £325k?
  

Sorry for all the questions. Obviously this an awful time for us but just trying to get our heads around a few things before we go and see the financial adviser next week. 

!!!!!!. Some other points:

1. If the estate does exceed £2m then the residential nil rate band is tapered away.  But this looks at the value of the estate on death (e.g. not gifts made in the last seven years).

2. Normal expenditure out of income: monthly standing order is great, saying "Love mum" or something is plenty.  Get help preparing the information for the IHT 403 form.  Doing it monthly helps show that there is a regular pattern.

3. Wedding, yes they can each gift £5,000 plus £1,000 is not possible a the legislation sets out the maximum "in respect of any one marriage".  

4. Gifts before death are immediate, but after death there will be delays because of the need to get probate.

5. Get wills, executors and an LPA sorted for each, get the details together of where the assets are, expression of wishes for DC pension schemes up to date, what information is needed for the IHT forms, etc

6. Credit card spending - Keep_pedalling said "That is still a gift that needs to be declared, they should not try to put their executors in a position where they are committing tax avoidance".  If the executors new about this, it would be tax evasion.

silvercar

So sorry for the situation you find yourselves. Hope things go as smoothly as is possible over their remaining time.

• Wedding gift: We have decided to re-plan our wedding and bring it forward to happen in the next few months so that they can both be there. Am I right in saying, that both parents can gift £5k to my OH, and then £1k each to “another person” aka myself inheritance tax free, thus losing £12k straight away? Can they give us the money as a lump or is it better for them to pay suppliers direct?

  
  

My understanding is that the parents could choose to spend their money on a wedding for their child without this being considered a gift to the child. It is the parents spending their money as they choose and isn’t a gift. Outside of this they could then make a wedding gift to their child. This is the norm in some cultures/ families and shouldn’t raise an eyebrow with hmrc.

More_complicated_than_that

silvercar said:

So sorry for the situation you find yourselves. Hope things go as smoothly as is possible over their remaining time.

• Wedding gift: We have decided to re-plan our wedding and bring it forward to happen in the next few months so that they can both be there. Am I right in saying, that both parents can gift £5k to my OH, and then £1k each to “another person” aka myself inheritance tax free, thus losing £12k straight away? Can they give us the money as a lump or is it better for them to pay suppliers direct?

  
  

My understanding is that the parents could choose to spend their money on a wedding for their child without this being considered a gift to the child. It is the parents spending their money as they choose and isn’t a gift. Outside of this they could then make a wedding gift to their child. This is the norm in some cultures/ families and shouldn’t raise an eyebrow with hmrc.

That may be right.  My preferred view is that it will depend on the facts but there must be a good risk that some or all of it would be a disposition (again, facts would say whether it one PET, a 100 small PETs or a chargeable lifetime transfer). 

Even if not, there must be a risk that this becomes part of normal expenditure out of income and so is a zero-sum game (i.e. normal expenditures goes up, surplus income goes down).  

Albermarle

• Some clarification of  points already made.
• 
  
• £3K annual allowance: they have already been using this and will continue to do so, with hopefully them making it to the next tax year to lose another £6K. 

If they did not make any gifts in the last tax year, they can each carry forward the £3K annual allowance. So they could give £6K each this tax year, and £3K each in following tax years.

I'm not an expert, but if your partners parents are under 75 they may be able to put some more of their available savings into a pension which would then be passed, IHT free to their beneficiaries if they die before 75.

Currently unused DC pension pots are not included in a persons estate, so are effectively IHT free whenever the person in question dies. ( there some rumours this might change in the budget but unlikely).
The beneficiaries of the unused DC pots currently can take them tax free if the donor dies before 75, otherwise withdrawals will be classed as taxable income ( this age 75 rule could also be potentially removed in the budget)
The parents would only be able to add significant money to a pension if they were still earning, and in any case it would probably be seen as IHT evasion due to their life limiting illnesses.

In their shoes my priority here would be to make sure my will was up to date and that I have lasting powers of attorney for both welfare and finance in place, if that is not the case already then seeing a solicitor is more important than seeing an IFA.

Although a solicitor is needed for the wills, you can easily DIY the Lasting Powers of attorney and would probably be quicker. Although it takes about 12 weeks whichever way you do it.
The urgency of LPA's is probably down to the nature of the illness. They are usually most useful for people who are potentially losing mental capacity.

More_complicated_than_that

Albermarle said:

...

I'm not an expert, but if your partners parents are under 75 they may be able to put some more of their available savings into a pension which would then be passed, IHT free to their beneficiaries if they die before 75.

...

The parents would only be able to add significant money to a pension if they were still earning, and in any case it would probably be seen as IHT evasion due to their life limiting illnesses.

First, making a contribution to a pension scheme is definitely not "evasion". 

If a contribution to a pension scheme is made and tax relief is received, it is fine. 

If no tax relief was available (e.g. because it was more than £2,880 in the tax year and the individual had no relevant UK earnings) then the facts may mean that it is (i) a chargeabe lifetime transfer when made, and (ii) included in the estate for IHT purposes if made in the previous seven years. If so, contriibutions in excess of the normal limits would not help.  

HMRC ask questions about contributions made in the two years before death on the IHT forms.  If someone is in good health and then dies, the facts may be such that an examption applies (e.g. s10).  But where someone is in ill-health when the contributions are made, it may be difficult to see why any exemption would apply.  

TF03

Thanks for all the thoughts everyone. 
Just wanted to add, we are 100% encouraging them to live life to the fullest with what they have left which is easier said than done. They are both very stubborn! But we are booking in lots of family activities together and going out for a lot of nice dinners! 
They are both very old school, don't do computers, everything has to be face to face. So they have encouraged us to try and find this information out. 

Interesting points re: pension pot and under 75. I think they are just both under 75 so will add this to the list of things to mention to the solicitor next week. 

Thank you for clarifying the wedding gift as well. That's at least £10k they can lose. Interesting thought that they could actually still contribute more than this via the surplus income spending. I guess the main difference being is that the £10k is a lump sum that would be referenced as "wedding gift" on the transfer whereas for example they could pay for my OHs hair, flowers etc out of their surplus income. 

Keep_pedalling

To be able to claim the surplus income exemption the executor is going to have to show a a pattern of gifting not one offs. So for example if each of them has income of £32k and they only spend £20k then they could make gifts of £1000 a month over the year. To help your executors you need to keep good records of both your expenditure and gifts from income. Have a look at boxes 20-22 on IHT403 to see the level of detail required. 

I think upping there spending is a more productive approach. Something we have been doing for a number of years is hiring a cottage or villa each and inviting family to stay with us. Not only does it help with IHT mitigation it gives us more quality  time with children and grand children. To take the pressure of they could pay for someone to clean and or look after the garden.

paulypost

Horrible situation to be in and you have my deepest sympathy.
However, if they feel able you should encourage them to engage with an estate planning consultant who could develop a framework of trusts including a review of their wills as well as a protective gifting trust which will ringfence up to £625k for passing on to the family free of IHT. We are literally (on Monday) about to sign up for exactly this approach. It's not cheap but potentially a very good investment. For approx £10k in fees we hope to save c£330k in IHT. I say 'we' but of course it wont be us that will benefit. It is mostly my hard earned of course on which I've already paid a LOT of tax already?
Thankfully we are both in good health and sound very similar to your about to be in-laws. My wife is stubborn and I'm computer friendly and very frugal. One of the main pieces of advice is spend spend spend and I struggle with that even though each expenditure is really only costing 60% of the price tag?
This approach can take some months but the first step is the hardest. Oh and BTW have they done Lasting Powers of Attorney? Arguably according to Martin in a recent podcast these are more important than wills.