IHT 7 year rule gifting

ironmongem

My (married) parent's estate is over the £1 million IHT threshold (2 x £325k + 2 x £175k RNRB). They're considering closing some of their stockbroker accounts and gifting the proceeds, in the hope that they survive the gift by 7 years.

My understanding of IHT is that they can gift the proceeds in any way they want. For example, if the proceeds were £100k each, they could gift £100k each; or they could split it £150k/£50k, or £200k/£0k. Is that correct?

Keep_pedalling

Yes, or if one of them is a lot less likely to survive 7 years than the other it could all come from one of them.

If these equities are not held in ISAs they will probable looking at a significant CGT liability when they cash them in.  

Bookworm105

as above
but given the reasonably significant sums you mention, are you aware that if a gift is >£325,000 then the recipient has to pay IHT on it?
It does not get treated as part of the tax payable by the estate if the donor fails to make 7 years 

Mothman

Bookworm105 said:

as above
but given the reasonably significant sums you mention, are you aware that if a single gift is >£325,000 then the recipient has to pay IHT on it?
It does not get treated as part of the tax payable by the estate if the donor fails to make 7 years 

Are you sure that's correct? My understanding was that IHT is usually paid by the estate and HMRC would only come after the recipient of a gift in instances where there were insufficient funds left in the estate to meet the IHT due. Also that tapered relief would be available on the portion of the gift above £325k.

sheramber

Mothman said:

Bookworm105 said:

as above
but given the reasonably significant sums you mention, are you aware that if a single gift is >£325,000 then the recipient has to pay IHT on it?
It does not get treated as part of the tax payable by the estate if the donor fails to make 7 years 

Are you sure that's correct? My understanding was that IHT is usually paid by the estate and HMRC would only come after the recipient of a gift in instances where there were insufficient funds left in the estate to meet the IHT due. Also that tapered relief would be available on the portion of the gift above £325k.

https://www.gov.uk/inheritance-tax/gifts#:~:text=The 7 year rule,on when you gave it.

How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

Keep_pedalling

sheramber said:

YMothman said:

Bookworm105 said:

as above
but given the reasonably significant sums you mention, are you aware that if a single gift is >£325,000 then the recipient has to pay IHT on it?
It does not get treated as part of the tax payable by the estate if the donor fails to make 7 years 

Are you sure that's correct? My understanding was that IHT is usually paid by the estate and HMRC would only come after the recipient of a gift in instances where there were insufficient funds left in the estate to meet the IHT due. Also that tapered relief would be available on the portion of the gift above £325k.

https://www.gov.uk/inheritance-tax/gifts#:~:text=The 7 year rule,on when you gave it.

How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

In practice it would still normally come out of the residue estate HMRC are not concerned who pays it as long as it is paid. It will also be the case in the vast majority of cases that the receivers of the gifts will be the same people inheriting the estate. 

The main problem of a very large gift coming from just one spouse is that IHT may be payable on the first death, but that risk can normally be covered by term insurance. 

silvercar

The risk is paying a CGT liability now and then sadly not surviving 7 years and the estate (or individual) paying IHT on the same amount.

ironmongem

Huge thanks for all the replies.

All the shares are in ISAs, so no CGT to pay on the sales.

The total to be gifted would be over the £325k allowance, so we’d need to decide how to split it. If my understanding is correct, there are basically two choices:

1. Both parents gift less than £325k.
If either of them lives over 7 years, there’s no IHT to pay on their gift.

2. One parent gifts the whole amount.
If the donor lives over 7 years there’s no IHT to pay.
If the donor passes away before 7 years, there will be an immediate IHT bill to pay. The amount of the gift in excess of £325k will be taxed at 40%, or less if taper relief applies.

I suppose we could also combine both of the above, so one parent gifts less than £325k, and the other gifts more than £325k.

Madeinireland101

Or you could leave two sets of letters supporting the gifts for your executors with instructions to immediately destroy the one relating to the parent who dies first. I am of course joking as this would of course be fraud and you wouldn’t want to be depriving the tax man of his proper cut 😀