Inheritance tax treatment of gifts when first parent dies?

Overfunded

I’m confused and can’t find the answer on HMRC website.

I note the rules around gifting and 7yr period etc. What I can't see anywhere is whether any gift becomes liable for inheritance tax when the first parent dies or whether it only becomes a factor when the second parent dies (assuming the first parent leaves their estate to their surviving spouse). A simple example that hopefully illustrates my query: a gift of £80k is made to children from their parents. One parent dies shortly after leaving all their assets to their spouse. The second parent dies 8 years later and the estate is worth exactly £650k and left to surviving children. Is there any IHT to pay or not?

If there is IHT to pay on the gift on first death does that then mean the complete estate needs evaluated as it is no longer being passed to spouse in its entirety.

thanks 

doodling

Hi,

In your example, the £80k is part of the first estate and not covered by the spousal exemption.

That means that only £325-80k of their nil rate band is passed to their spouse.

The total nil rate band on the second death is therefore £650-80k (=£570k).

This obviously ignores any additional nil rate band arising as a result of home ownership.

Keep_pedalling

doodling said:

Hi,

In your example, the £80k is part of the first estate and not covered by the spousal exemption.

That means that only £325-80k of their nil rate band is passed to their spouse.

The total nil rate band on the second death is therefore £650-80k (=£570k).

This obviously ignores any additional nil rate band arising as a result of home ownership.

For a joint gift only £40k would be used. 

Overfunded

Thanks for the responses.

So as it’s a joint gift the nil rate band passed to the surviving spouse would be reduced by £40k.

If I change my scenario and say the gift was 6 years ago so the applicable IHT rate would be 8%.

Is there an option just to pay the IHT rather than reducing the amount of nil rate band passed to spouse? 

Keep_pedalling

Overfunded said:

Thanks for the responses.

So as it’s a joint gift the nil rate band passed to the surviving spouse would be reduced by £40k.

If I change my scenario and say the gift was 6 years ago so the applicable IHT rate would be 8%.

Taper relief only applies to gifts over £325k so no that is not the case.

Is there an option just to pay the IHT rather than reducing the amount of nil rate band passed to spouse? 

No, and it would be a pointless exercise even if you could, especially as by the time the second spouse dies their estate may have been significantly reduced through things like care costs.

poseidon1

Overfunded said:

Thanks for the responses.

So as it’s a joint gift the nil rate band passed to the surviving spouse would be reduced by £40k.

If I change my scenario and say the gift was 6 years ago so the applicable IHT rate would be 8%.

Is there an option just to pay the IHT rather than reducing the amount of nil rate band passed to spouse? 

Incorrect.
Taper relief ( which is what you seem to be referring to) only applies if the failed potentially exempt transfer is in excess of the NRB at death.

In your scenario it clearly is not. The £40k failed pet from 6 years previous merely reduces that parent's NRB to £ £285k leaving the survivor with joint NRB of £610k.

Of course if the survivor fails to survive their 7 year period on the joint gift, the remaining NRBs on 2nd death reduce to £570k as indicated by doodling.