Gifting to son, 7 year rule question

Boleyn19

I hope you can help with some suggestions.
We put money aside for university living expenses for our two sons. 

The elder went to university and used up his funds. These are now outside the 7 year rule.

The younger hasn’t gone to university so we are gifting him his funds. The funds are in my name. 

My question is if I die before the 7 years is up he will have IHT to pay. But our elder son won’t. This seems very unequal but I can’t get my head round how to make it fair.
We will be updating our wills soon.

Can anyone suggest what to do? 

Keep_pedalling

No he won’t pay IHT unless you are gifting him over £325k. Unless you have gifted beyond that amount your estate pays any IHT due not people who you have gifted to. 

Assuming you are married then you should make this a joint gift, so you can maximise your annual allowances and spread the risk of an early death.

SadCodeMan

I don't think this would fall under a gift for IHT purposes probably.

(From https://www.wake-smith.co.uk/advice-centre/estate-planning/probate-estate-planning/How-to-help-financially-support-children-and-grandchildren-through-university)

If a child is in full-time education, parents can pay for rent, tuition fees and maintenance without there being any Inheritance Tax implications.

Boleyn19

To clarify. 

I am married but the accounts are in my name. 
Our younger son is not in education.
our estate at the moment is over the IHT threshold.

So if die first, within 7 years, I can will the amount of the funds to my son as they will be well under £325k. If 
I die second and within 7 years then my sons will be left half the remaining estate each but younger son’s gifts will form part of the estate whilst the equivalent to the elder won’t. Do you see my dilemma?

Emmia

Boleyn19 said:

To clarify. 

I am married but the accounts are in my name. 
Our younger son is not in education.
our estate at the moment is over the IHT threshold.

So if die first, within 7 years, I can will the amount of the funds to my son as they will be well under £325k. If 
I die second and within 7 years then my sons will be left half the remaining estate each but younger son’s gifts will form part of the estate whilst the equivalent to the elder won’t. Do you see my dilemma?

How much money are you thinking of giving him?

Could you do "gifts out of excess income" i.e. by paying your son in installments, out of the income you and your wife receive, but crucially without reducing your living standards.

https://hwfisher.co.uk/gifts-out-of-surplus-income-three-rules-to-remember/

Boleyn19

Emmia said:

Boleyn19 said:

To clarify. 

I am married but the accounts are in my name. 
Our younger son is not in education.
our estate at the moment is over the IHT threshold.

So if die first, within 7 years, I can will the amount of the funds to my son as they will be well under £325k. If 
I die second and within 7 years then my sons will be left half the remaining estate each but younger son’s gifts will form part of the estate whilst the equivalent to the elder won’t. Do you see my dilemma?

How much money are you thinking of giving him?

Could you do "gifts out of excess income" i.e. by paying your son in installments, out of the income you and your wife receive, but crucially without reducing your living standards.

https://hwfisher.co.uk/gifts-out-of-surplus-income-three-rules-to-remember/

The funds are c£36k. £25k has been gifted this year. Another £11k to be gifted soon. We are retired and so have no income apart from pensions. We are savings rich but that does not count as income.
And I’m the wife 😉

Keep_pedalling

Boleyn19 said:

To clarify. 

I am married but the accounts are in my name. 
Our younger son is not in education.
our estate at the moment is over the IHT threshold.

So if die first, within 7 years, I can will the amount of the funds to my son as they will be well under £325k. If 
I die second and within 7 years then my sons will be left half the remaining estate each but younger son’s gifts will form part of the estate whilst the equivalent to the elder won’t. Do you see my dilemma?

All you need to do to make it a joint gift is to transfer the money to a joint account and make the gift from there. Alternatively gift you half to him the other half to your wife to gift from a sole account of hers. Transfers between spouses are exempt from the 7 year rule.

Boleyn19

Keep_pedalling said:

Boleyn19 said:

To clarify. 

I am married but the accounts are in my name. 
Our younger son is not in education.
our estate at the moment is over the IHT threshold.

So if die first, within 7 years, I can will the amount of the funds to my son as they will be well under £325k. If 
I die second and within 7 years then my sons will be left half the remaining estate each but younger son’s gifts will form part of the estate whilst the equivalent to the elder won’t. Do you see my dilemma?

All you need to do to make it a joint gift is to transfer the money to a joint account and make the gift from there. Alternatively gift you half to him the other half to your wife to gift from a sole account of hers. Transfers between spouses are exempt from the 7 year rule.

I’m the wife. Statistically my husband is likely to die before me and he is older than me as well. 

Boleyn19

SadCodeMan said:

I don't think this would fall under a gift for IHT purposes probably.

(From https://www.wake-smith.co.uk/advice-centre/estate-planning/probate-estate-planning/How-to-help-financially-support-children-and-grandchildren-through-university)

If a child is in full-time education, parents can pay for rent, tuition fees and maintenance without there being any Inheritance Tax implications.

It would not count here as younger son is not in education. 

I probably knew about maintenance being outside IHT at the time but has forgotten. Thanks

SadCodeMan

Ah. Sorry. I misunderstood. I thought you were saying that he had not been yet but now I see I misread!

saajan_12

Its not the son that has to pay the IHT, its the estate. If you're savings rich, then the total IHT would be calculated accounting for large gifts in the last 7 years if applicable, and the estate would pay the tax due and then distribute the rest. 
Eg For simplicity, lets say you gave £36k to second son and then died with £425k in savings, no property, no shared allowance from husband etc. So your taxable estate is £461k, of which 325k is tax free and 136k is taxable at 40%. £136k x 40% = £54.4k tax due. You'd pay that out of the 425k savings, and then distribute the remaining £370.6k. 

You don't have to tax each bit of money separately, its just a total. So unless you've gifted out so much that there isn't enough cash in the estate to meet the tax bill, there's no issue. Just set both sons to be residual beneficiaries, ie they don't get a portion of specific items (house / savings / whatever) but rather an equal share of what's left. 

The only other issue is if the savings are tied up in assets which the beneficiaries want to keep, then they may have to pay tax in order to keep the house say. That would be their choice.