Gifting to son, 7 year rule question

poseidon1

Boleyn19 said:

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 😉

If you died with 7 years of making the total £36k gift, all that would happen is this would be deducted from your £325k nil rate band ordinarily available at death.

Your son certainly would not face a personal IHT bill, your estate would just have less NRB avaliable to mitigate the overall estate tax bill.

In a scenario where both parents have passed, both sons will share the IHT bill related to the £36k earlier failed gift on the assumption they inherit equally.

Boleyn19

saajan_12 said:

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. 

Thank you. Yes I understand this. But if I die before the 7 years, the funds gifted to younger son will form part of the estate and and if IHT is payable from the estate and then the residue divided equally. To me this means that the younger has lost out in some way as elder’s funds do not form part of the estate.

SadCodeMan

The gift would only form part of the estate from a tax point of view. The distribution of what is left would still be equal.

So if child 1 had 36K and child 2 had 36K and the estate left at point of death was X then the tax due would be based on X+ 36K but each child would get (X - 'any IHT if any needed') / 2.

Child 2 would not actually pay the gift back to the estate or anything like that. They both get 36K + 'X after tax'
/2 

Boleyn19

SadCodeMan said:

The gift would only form part of the estate from a tax point of view. The distribution of what is left would still be equal.

So if child 1 had 36K and child 2 had 36K and the estate left at point of death was X then the tax due would be based on X+ 36K but each child would get (X - 'any IHT if any needed') / 2.

Child 2 would not actually pay the gift back to the estate or anything like that. They both get 36K + 'X after tax'
/2 

It is the tax I am thinking of. So elder son has been gifted £36k and is outside the estate. The younger is gifted the same but his gift is part of the estate. So they share the residue equally after IHT paid. But younger son’s £36k could be part of a 40% IHT but not elder’s but they both lose out. 

I don’t think I am explaining my unease in a clear way.

In addition my husband’s elder son will be gifted 50% of my old house, my husband’s share, when we sell it. He will put aside 40% and then reduce this as the taper kicks in. So if the house remains in the estate he can pay this bit IHT to HMRC. 

SadCodeMan

It is true they both would lose out compared to having no tax to pay but they both lose out the same amout as each other. They both end up 'paying' half of any tax which results from the gift (if any).
I.e. they both end up getting the same total amount as each other.

The more complex addition of the house to too much for me to comment on I am afraid. I think a fair bit more info needed. It is also then harder to say what is 'fair' or not because that sounds like it stops being a simple monetary question perhaps.

Keep_pedalling

Boleyn19 said:

SadCodeMan said:

The gift would only form part of the estate from a tax point of view. The distribution of what is left would still be equal.

So if child 1 had 36K and child 2 had 36K and the estate left at point of death was X then the tax due would be based on X+ 36K but each child would get (X - 'any IHT if any needed') / 2.

Child 2 would not actually pay the gift back to the estate or anything like that. They both get 36K + 'X after tax'
/2 

It is the tax I am thinking of. So elder son has been gifted £36k and is outside the estate. The younger is gifted the same but his gift is part of the estate. So they share the residue equally after IHT paid. But younger son’s £36k could be part of a 40% IHT but not elder’s but they both lose out. 

I don’t think I am explaining my unease in a clear way.

In addition my husband’s elder son will be gifted 50% of my old house, my husband’s share, when we sell it. He will put aside 40% and then reduce this as the taper kicks in. So if the house remains in the estate he can pay this bit IHT to HMRC. 

I am confused in your opening post you talk about your sons, in this one your husband’s oldest son, does this mean this is a blended family with two sons form your marriage and your husband has an older son from a previous relationship ship? 

Boleyn19

Keep_pedalling said:

Boleyn19 said:

SadCodeMan said:

The gift would only form part of the estate from a tax point of view. The distribution of what is left would still be equal.

So if child 1 had 36K and child 2 had 36K and the estate left at point of death was X then the tax due would be based on X+ 36K but each child would get (X - 'any IHT if any needed') / 2.

Child 2 would not actually pay the gift back to the estate or anything like that. They both get 36K + 'X after tax'
/2 

It is the tax I am thinking of. So elder son has been gifted £36k and is outside the estate. The younger is gifted the same but his gift is part of the estate. So they share the residue equally after IHT paid. But younger son’s £36k could be part of a 40% IHT but not elder’s but they both lose out. 

I don’t think I am explaining my unease in a clear way.

In addition my husband’s elder son will be gifted 50% of my old house, my husband’s share, when we sell it. He will put aside 40% and then reduce this as the taper kicks in. So if the house remains in the estate he can pay this bit IHT to HMRC. 

I am confused in your opening post you talk about your sons, in this one your husband’s oldest son, does this mean this is a blended family with two sons form your marriage and your husband has an older son from a previous relationship ship? 

Sorry to confuse. My husband has a son from his first marriage who is in his 40s. He will get half the proceeds of the sale of my old house. And if needed he will have saved funds to pay some of the IHT.
we have two sons together aged 25 and 21. The gifts to the younger are the ones I am concerned about.

mybestattempt

we have two sons together aged 25 and 21. The gifts to the younger are the ones I am concerned about.

@Boleyn19

Perhaps it would ease your concern to think about it in this simplistic way:

By next year you will have given each son £36000.

Because of the timing of the gifts to your younger son there maybe  additional IHT of £14400  (£36000 x 40%).

When your estate is distributed each son's share is reduced by £7200 (£14400/2).

The overall net effect is that each son has received £28800 (£36000 - £7200).

There will be many families where some children get significant gifts years before their siblings get equal gifts. Provided each sibling has an equal share of the estate they inherit then any IHT burden relating to gifts caught by the 7 year rule is in effect shared and no one misses out.

Keep_pedalling

One other option is to take out term insurance to cover any tax impact of you meeting an untimely demise. It is something we have done to cover our larger gifts. 

As for your blended family situation do your wills contain immediate post death interest trust clauses? If not it might well be worthwhile reviewing your current wills with a STEP qualified solicitor.