IHT and other taxes on single large cash gifts

older_and_no_wiser

My partner has 2 elderly parents (93 an 89) and are in the no-go phase of retirement with very little outgoings. She is one of two siblings. Her parents have a will which will transfer the full estate between them when one dies. When the final parent dies, the full estate will be split between the two children. The total estate is probably valued around £900,000 - home, pension, investments, savings. There's no mortgage or other debt.

The family don't really discuss finances and no provision has been put in place to protect any IHT liability. They only seem comfortable gifting £3,000 p/a to each child as they are worried about IHT if they gift anything above that.

My partner is wanting to pay off her mortgage and is struggling a little with finances. They are a "normal" loving family and there's no inter-family issues around relationships, finances etc. I have suggested (just to my partner!) that her parents gifting a large amount to her won't negatively impact IHT when the time comes - as long as they are aware that any large gift may be liable to IHT - which it would be anyway even if it isn't gifted. The children will already need to pay IHT due to the size of the estate, and if they both pass away after 7 years or even after a few years, that IHT liability will be smaller if they have gifted any large amounts. So long as the two children keep records of the gifts then there's no issue and it may even be beneficial to them. In addition, the parents get the pleasure of seeing how their gifts impact the family while they are alive.

Have I missed anything in my thinking? Are there any other taxes that may be due when gifting large amounts?

On-the-coast

You’ve missed that there is likely to be no IHT on a joint estate of that size. 

Also that care costs may be required in the future. 

So id be very cautious in suggesting generational transfer of funds. 

£3000 pa per child is pretty generous imo. 

older_and_no_wiser

On-the-coast said:

You’ve missed that there is likely to be no IHT on a joint estate of that size. 

Thanks for the reply. I'm not sure I understand this. Are you saying that when the second partner dies, the estate is treated as being passed from two people (ie IHT is paid on anything above the current threshold per person - £325,000 x 2)?

Sorry for the confusion.

Sarahspangles

This covers the scenarios where the estate of the second spouse to pass away can be £1m and the family pay no inheritance tax. 

https://www.muckle-llp.com/insights/legal-commentary/the-1-million-inheritance-tax-threshold-fact-or-fiction/

It’s true that elderly people need to be aware that if they give assets away, and later don’t have resources to meet care costs, the earlier gifts can be treated as deprivation of assets in a social care assessment. The seven year rule is not relevant to this. But with a high value estate and modest gifts that’s less of a concern.

All of this is dependent on the couple wanting to do anything, of course. And there are considerations of fairness which can prevent upset at a time when people are raw from loss.

Keep_pedalling

Assuming that £900K includes a house worth at least £350k then between them they have total exemptions of £1M. 2x NRB (£650k) + 2 x residential NRB (£350k), so they are currently well under IHT territory. If one dies leaving everything to the surviving spouse then everything is covered by spousal exemptions and the unused NRBs can be transferred to the survivor’s estate. 

Gifting NEVER increases anyone’s IHT liability at worst it makes no difference. Any gifts over the annual exemption within the 7 years of death will simply use up a portion of the NRB that can be transferred to the surviving spouse but of cause the gifts will reduce the total estate by the same amount.

Albermarle

So in summary;
Their estate seems unlikely to have an IHT liability anyway.
Even if it did, gifting can never increase the IHT liability of the estate, and can decrease it if the giver lives 7 years.
If family relationships are good, then helping out family members with gifts now, rather than waiting for later benefiting from a will makes sense.
Enough should be retained to cover potential care costs. Of course this is not easy to estimate, but if cash runs out equity from the home can be used.

Nomunnofun1

older_and_no_wiser said:

On-the-coast said:

You’ve missed that there is likely to be no IHT on a joint estate of that size. 

Thanks for the reply. I'm not sure I understand this. Are you saying that when the second partner dies, the estate is treated as being passed from two people (ie IHT is paid on anything above the current threshold per person - £325,000 x 2)?

Sorry for the confusion.

As others have stated you appear to be unaware of the residential rate band (2 x £175k). 

Your partner’s  are right to be cautious but they can give away whatever they like from an inheritance tax point of view. 

EnPointe

older_and_no_wiser said:

On-the-coast said:

You’ve missed that there is likely to be no IHT on a joint estate of that size. 

Thanks for the reply. I'm not sure I understand this. Are you saying that when the second partner dies, the estate is treated as being passed from two people (ie IHT is paid on anything above the current threshold per person - £325,000 x 2)?

Sorry for the confusion.

325 k for  each  spouse ( normal IHT  threshold each, carries over if  married couple  have mirror wills or similar),   further 175k  each on  principal residence  as you state they own their own house   = 1million assuming the property is worth  350k )

DRS1

How would the parents get the cash for the gift?  If they have to sell something then there is CGT to consider.

Also given the will they would probably want to give the same amount to both children at the same time.

older_and_no_wiser

DRS1 said:

How would the parents get the cash for the gift?  If they have to sell something then there is CGT to consider.

Also given the will they would probably want to give the same amount to both children at the same time.

They have a large amount in savings, so wouldn't need to sell down any investments. 

It is only one child getting the gift.

DRS1

older_and_no_wiser said:

DRS1 said:

How would the parents get the cash for the gift?  If they have to sell something then there is CGT to consider.

Also given the will they would probably want to give the same amount to both children at the same time.

They have a large amount in savings, so wouldn't need to sell down any investments. 

It is only one child getting the gift.

But then the remainder is split 50/50 so the one who gets the gift has profited at the expense of the one who didn't.  Parents may not regard that as fair.