Inheritance tax on gifts

JuzaMum

If someone gifted four gifts of £200,000 and died within seven years of gifting, how is this taxed? Is it £200,000 x 4 minus the allowance of £325,000, then the remaining tax shared between the four beneficiaries, or something else? tia 

Brie

The estate pays the IHT not the beneficiaries.  This is assuming that there would be IHT at all.  Plus isn't there a reducing amount of IHT due as the 7 years ticks along??

Albermarle

JuzaMum said:

If someone gifted four gifts of £200,000 and died within seven years of gifting, how is this taxed? Is it £200,000 x 4 minus the allowance of £325,000, then the remaining tax shared between the four beneficiaries, or something else? tia 

Assuming that the deceased has only their £325K nil rate band and has not inherited one from a spouse, and presuming they are not passing on their home to their children. Also assuming there are no other savings or assets.

Then the first £325K will be 100% back in the estate and will use up the nil rate band.
The remaining £475 K will also go back into the estate but will be subject to taper relief, so the amount of IHT will depend on exactly how long after giving the gift they died.
That is my understanding anyhow.

DavidT67

Plus you can deduct the annual gift allowance as well.

Without more context this question is answerable.

eskbanker

DavidT67 said:

Without more context this question is answerable.

Logic inverted there - presumably should be 'with' or 'unanswerable'....

HappyHarry

Hold up - there is some incorrect information above.

Assuming that all annual allowances have been used elsewhere and no other gifts have been made in the seven years prior then:

i) The first gift made falls within the £325000 Nil Rate Band and so is exempt from inheritance tax.

ii) The second gift made partly falls within the Nil Rate Band, so £125000 of this gift is exempt and £75000 of this gift is liable to inheritance tax but could benefit from taper relief.

iii) The third and fourth gifts made gain are in excess of the Nil Rate Band and so are liable to Inheritance Tax but may benefit from taper relief.

The recipients of the second, third and fourth gifts are primarily responsible for paying the inheritance tax on their gifts, though in practice this is usually paid by the estate.

Keep_pedalling

Brie said:

The estate pays the IHT not the beneficiaries.  This is assuming that there would be IHT at all.  Plus isn't there a reducing amount of IHT due as the 7 years ticks along??

That is not always the case where gifts have exceeded the NRB

For example Fred is a single man with no children and owns a home worth £150k. He gives away £200k to John and the following day £200k to Jane. The week after he gifts £200k each to Tom and Janet. He dies a month after making these gifts with only enough liquid assets left to pay funeral expenses and his will leaves his house to his best friend Robert.

John pays nothing as his gift was made first and is covered by Fred’s NRB. The remaining £125k of his NRB is used up be the gift to Jane but £75k of her gift is subject to IHT so she owes HMRC £30k. Tom and Janet’s gifts will be fully subject to IHT and owe HMRC £80k each. 

The remains IHT will come out of Robert’s inheritance.

poseidon1

HappyHarry said:

Hold up - there is some incorrect information above.

Assuming that all annual allowances have been used elsewhere and no other gifts have been made in the seven years prior then:

i) The first gift made falls within the £325000 Nil Rate Band and so is exempt from inheritance tax.

ii) The second gift made partly falls within the Nil Rate Band, so £125000 of this gift is exempt and £75000 of this gift is liable to inheritance tax but could benefit from taper relief.

iii) The third and fourth gifts made gain are in excess of the Nil Rate Band and so are liable to Inheritance Tax but may benefit from taper relief.

The recipients of the second, third and fourth gifts are primarily responsible for paying the inheritance tax on their gifts, though in practice this is usually paid by the estate.

I am with your general analysis HappyHarry, subject to:

* None of the gifts were to exempt entities ( eg charity or spouses)

* None of gifts 2, 3 or 4 were into a lifetime trusts, in which case 20% lifetime IHT at date of gift, followed by further potential 20% IHT on death up to 14 years thereafter.

As for the liability falling on the deceased estate if beneficiaries 2, 3 and 4 refuse to pay, that can be very bad news for the estate residual beneficiaries if they were not the parties that received the earlier gifts ( as indicated in Keep_pedalling's example).

I think the OP needs to be more precise with regard to her question, and prevailing  circumstances. 

Also worth pointing out that parties 2, 3, and 4 should be able to get cheap reducing term life cover to protect against death within 7 years. A prudent measure if gifting £800k from an estate that remains in the IHT net.

JuzaMum

For clarity - gifts were given at the same time to siblings, three plus years ago. The giver (parent) is now unwell and the siblings are trying to work out if they need to be prepared for a tax bill. They cannot discuss with the parent due to their health. There will be money/asset left in the estate

Albermarle

JuzaMum said:

For clarity - gifts were given at the same time to siblings, three plus years ago. The giver (parent) is now unwell and the siblings are trying to work out if they need to be prepared for a tax bill. They cannot discuss with the parent due to their health. There will be money/asset left in the estate

As mentioned they may be liable, but in practice the estate usually pays off all IHT liabilities ( if it can afford it).
HMRC are not bothered who pays as long as they get paid. 

Keep_pedalling

Albermarle said:

JuzaMum said:

For clarity - gifts were given at the same time to siblings, three plus years ago. The giver (parent) is now unwell and the siblings are trying to work out if they need to be prepared for a tax bill. They cannot discuss with the parent due to their health. There will be money/asset left in the estate

As mentioned they may be liable, but in practice the estate usually pays off all IHT liabilities ( if it can afford it).
HMRC are not bothered who pays as long as they get paid. 

Agree, this is only likely to be a problem if the beneficiaries of the will are different people. So if the beneficiary is the spouse of the testator the IHT should fall on the children as everything a spouse inheritance is exempt from IHT.