Inheritance Tax on car

Marshmallows79

My Dad (88) has been told he is no longer allowed to drive. He has gifted his car (£10k ish value) to my son. My question is should we pay for the car to avoid inheritance tax and if so, is it important to pay market value? 

doodling

Hi,

How big will Dad's estate be when he passes away?  Inheritance tax wont be an issue if:
1. His estate is less than £325k; or
2. His estate is less then £500k and includes a house which ihe is leaving to his offspring; or
3. His estate is less than £650k and he was married and his deceased wife left everything to him; or
4. His estate is less than £1m and he was married, his deceased wife left everything to him and he has a house worth at least £350k which he is leaving to his offspring.

If your Dad's estate is more than whichever figure above is applicable then the next question is what is your Dad is going to do with the money? If he is going to save it then it doesn't make any difference to inheritance tax because he will still have the money when he dies.  If he is going to spend it before he dies then yes, paying for the car might save inheritance tax.  On the other hand, if he lives 7 years after giving the car away then the car also won't have any effect on the inheritance tax bill.

Finally, you need to consider deprivation of assets.  If your Dad needs funded care then if the car is a large proportion of his assets then the council may consider that he still has the value of it when assessing how much funding they are willing to provide.  On the other hand, if the car is a small proportion of his assets then they probably won't care 

poppystar

Not sure how it could affect IHT especially as your father is alive still. If you are worried it is a gift and would be added to his future estate total then surely so would any money paid for it now - so if you pay market value nothing changes at all in the IHT position. Is your father’s estate large enough to pay IHT anyway? And even if it is now then it might not been on death if there are care provisions that he has to pay for in the future. The only issue I could see is if other beneficiaries thought your son had gained more but if that’s not the case then I can’t see anything to be concerned on. 

Keep_pedalling

First off with a gift of this value your son will have no liability of having to pay IHT.

Paying full market rate for it could actually increase the amount of IHT payable. Your father has an annual exemption of £3000 pa so if he has made no other gifts this financial year (other than the normal Christmas and birthday gifts) then then £3000 falls out of his estate straight away and the remaining £7000 will fall out if he lives another 7 years. If he made no gifts in the previous tax year then that £3000 falls out as well.

So as an example he has 2 years of annual exemption available and a total estate of £510k and gifts the car his estate drops to £504k straight away.

If however you buy the car from him he swaps out a car for cash so the estate stays at £510 with potencially an extra £2,400  of tax to pay.

None of this matters however if his estate is not in IHT territory, as if he is a home owner his estate could have as much as £500k in exemptions and it could be double that if he is a widower.  

boingy

Accept the gift and thank your dad! It's unlikely that there will be any IHT impact. You could always stick a couple of thousand in a savings account and ringfence it if you are worried.

But more importantly than that, make sure you, your son, or someone else makes some effort to keep your dad mobile. Losing the ability to drive is a huge change for most people.

bobster2

boingy said:

Accept the gift and thank your dad! It's unlikely that there will be any IHT impact. You could always stick a couple of thousand in a savings account and ringfence it if you are worried.

This is pointless - beneficiaries of gifts do not normally pay IHT* - even in circumstances where the estate is in IHT territory. Estates pay IHT.

(*Except in some exceptional circumstances - e.g. where the donor has given away > £325,000 in the form of gifts before their death - then a beneficiary of a gift might be asked to pay).