Inheritance tax difference of opinions

Howarewetoday

Over Christmas I met up with a distant relative. This year's argument was about inheritance tax. Apparently my relative's very well to do boss has been gifting £40,000 a year to his daughter. He plans to do this for 10 years or more. It's a plan to reduce inheritance tax by all accounts. It's not surplus income; it's money from his savings.  Apparently the boss has got £500,000 plus saved up for passing to his daughter and could hand it all over now should he wish. The boss reckons to have taken independent financial advice and reckons to have been told that the inheritance tax on the gifts will be reduced due to the taper relief. He doesn't give, or plan to give, lump sums to anyone else apparently. 

I'm no expert on inheritance tax or much else but I'd read that the taper relief only kicks in when the £325,000 has been used up. I can't see how £40,000 a year would lead to the £325,000 being used up as seven years of it would be below the £325,000.

I'd have thought that the bloke would be better off giving away the rest of what he intends to in one sum so that the taper would apply to his earlier gifts and the inheritance tax would end altogether in 7 years. As I understand it, his daughter would need to put plans in place to pay the tax bill should the worse happen.

Does this sound right? My relative reckons that the boss's comments about taper relief are accurate and the £40,000 per year plan is the better way ahead. I reckon it's not.

The second point of debate was whether the boss should sign over his £200,000 life assurance to his daughter. He's been told to do so by his financial adviser but the chap was vague as to whether there would be tax to pay. Neither my relative nor myself had a clue - so no argument about this one thankfully.

I'm still curious as to whether it's a good idea to sign over life assurance when he's already racked up large gift amounts though. 

Keep_pedalling

Taper relief would only apply to £75k of a £400k gift, the behest advantage to giving it away in one lump sum would be to increase the odds that the whole lot would be covered by the 7 year rule. He may however have very good other reasons to spread the gift over 19 years that have nothing to do with tax.

silvercar

Worth looking at this thread:

https://forums.moneysavingexpert.com/discussion/6647150/gifts-from-income#latest

In particular, this quote from the 4th post:

""If a gift is made out of a current account you only need to check that the gift could have been made out of income. You do not need to match the gift to specific money in the account."
"

It maybe that the boss has excess income that he is regularly able to pass to his daughter, even if the money he gives is actually being withdrawn from a bond/savings. 

ader42

People have a tendency to try to simplify these things in their minds and ignore the actual process and rules. 

I imagine that the boss has a house worth £500k or more that he will pass to his daughter, so that would use up his allowance; (or he has a £1m house if he is wodowed for example). He therefore “thinks” everything else will be taxed - but the reality is different, the entire estate is taxed according to specific rules. In practice, assuming the daughter is the executor and sole beneficiary she could choose to either sell the house to pay the tax or choose to pay the tax from the gifts she has saved and not spent. 

That said, taper relief doesn’t just kick in after £325k or any other value for that matter, taper relief is applied as part of the calculation and may not have any actual effect on the IHT due from the estate but that doesn’t mean it isn’t part of the calculation.  

You could perhaps think of this as a similar scenario with Income Tax- people think income below £12,570 is tax free - it is not, it is taxable at zero percent - they are not the same thing. 

For example; if the boss has a house worth £500k that uses up all of his allowance and intends to leave it to his son, and his daughter gets her £400k and moves abroad and becomes untraceable, then the boss dies intending to leave his £500k house to his son, HMRC will get their IHT due by the estate by forcing the sale of the house, so the son will eventually get less than £500k. 

You are right about the potential to get more taper relief if the gifts are given earlier of course, that is how a taper works.

As for Life Assurance, it would depend on the policy, and where the proceeds payout to. If the policy does not payout to the estate then it should not have an IHT impact - proper formal advice needed of course. 

poseidon1

Howarewetoday said:

Over Christmas I met up with a distant relative. This year's argument was about inheritance tax. Apparently my relative's very well to do boss has been gifting £40,000 a year to his daughter. He plans to do this for 10 years or more. It's a plan to reduce inheritance tax by all accounts. It's not surplus income; it's money from his savings.  Apparently the boss has got £500,000 plus saved up for passing to his daughter and could hand it all over now should he wish. The boss reckons to have taken independent financial advice and reckons to have been told that the inheritance tax on the gifts will be reduced due to the taper relief. He doesn't give, or plan to give, lump sums to anyone else apparently. 

I'm no expert on inheritance tax or much else but I'd read that the taper relief only kicks in when the £325,000 has been used up. I can't see how £40,000 a year would lead to the £325,000 being used up as seven years of it would be below the £325,000.

I'd have thought that the bloke would be better off giving away the rest of what he intends to in one sum so that the taper would apply to his earlier gifts and the inheritance tax would end altogether in 7 years. As I understand it, his daughter would need to put plans in place to pay the tax bill should the worse happen.

Does this sound right? My relative reckons that the boss's comments about taper relief are accurate and the £40,000 per year plan is the better way ahead. I reckon it's not.

The second point of debate was whether the boss should sign over his £200,000 life assurance to his daughter. He's been told to do so by his financial adviser but the chap was vague as to whether there would be tax to pay. Neither my relative nor myself had a clue - so no argument about this one thankfully.

I'm still curious as to whether it's a good idea to sign over life assurance when he's already racked up large gift amounts though. 

Pretty nonsensical advice seems to been given to the individual for the £40,000 gifts, since:

1) For each rolling 7 year period £40k  ( less £3,000 annual gifts exemption) drops out of account for IHT purposes in any event.

2)  If he survives until after year 7, £280k has already disappeared out of IHT contention and the  subsequent £40ks ( less £3000) merely erodes the £325k NRB available at death.

3) At no time has taper relief become an issue  in this situation.

As for the life policy, insufficient data to offer a view.

We don't know if it is a mere term policy that expires with zero value if he survives the term, in which case it has no value if gifted immediately.  Alternatively it could  be a whole of life permanent cover that has already accrued a significant surrender value, which may constitute a PET equal to the surrender value requiring 7 year survival to fall out of account.

However in all fairness what has been related in this post, is an IHT planning strategy as translated by two third parties  ( OP and relative) as explained by the main protagonist the (relative's boss). Plenty of opportunities for something to be lost in translation, especially by individuals lacking technical understanding of the fundamentals.

NorthYorkie

1. Taper relief reduces the tax due on the gift.
2. If there is no tax due on the gift, then there is no need for taper relief (i.e. x% of zero is still zero).

(I hope the boss's adviser has professional indemnity assurance)

Albermarle

NorthYorkie said:

1. Taper relief reduces the tax due on the gift.
2. If there is no tax due on the gift, then there is no need for taper relief (i.e. x% of zero is still zero).

(I hope the boss's adviser has professional indemnity assurance)

As explained in the post previous to yours, taper relief is a non issue in the situation the OP describes.
It only ever applies once the gift is large enough to use up the £325K nil rate band, and only for amounts above that. ( plus of course you have to die within 7 years of making the gift) .

NorthYorkie

Albermarle said:

NorthYorkie said:

1. Taper relief reduces the tax due on the gift.
2. If there is no tax due on the gift, then there is no need for taper relief (i.e. x% of zero is still zero).

(I hope the boss's adviser has professional indemnity assurance)

As explained in the post previous to yours, taper relief is a non issue in the situation the OP describes.
It only ever applies once the gift is large enough to use up the £325K nil rate band, and only for amounts above that. ( plus of course you have to die within 7 years of making the gift) .

Yes, that's what I am saying

Albermarle

NorthYorkie said:

Albermarle said:

NorthYorkie said:

1. Taper relief reduces the tax due on the gift.
2. If there is no tax due on the gift, then there is no need for taper relief (i.e. x% of zero is still zero).

(I hope the boss's adviser has professional indemnity assurance)

As explained in the post previous to yours, taper relief is a non issue in the situation the OP describes.
It only ever applies once the gift is large enough to use up the £325K nil rate band, and only for amounts above that. ( plus of course you have to die within 7 years of making the gift) .

Yes, that's what I am saying

OK I misunderstood your post.

Howarewetoday

Wow! thanks. I called my relative last night and tried not to gloat about the taper relief comments. I also asked about the life assurance situation. Apparently the life assurance was the reason why his boss met with the adviser in the first place. It seems like the life assurance is worth around £200,000 and rising which due to pay out to his wife on the boss's death. His wife is also in the policy with additional life cover.  The boss wants to take it out of the estate by gifting it to his daughter (who is his only child, apparently). The complication seems to be that the value of his life assurance plus the amount that he has gifted to her would exceed his £325,000.

From one of the excellent responses on here regarding the £325,000 allowance and the value of the whole estate. Is there a pecking order for what is taxed? So, it the case of the boss, if his house wasn't married and is worth £500,000 (which my relative reckons it probably is) but he had given cash gifts over the 7 year period before his death, would the £325,000 plus £175,000 allowance be used up against the value of his £500,000 house first? Presuming that his estate has no other value. If so, would this mean that the 'older' cash gifts would have the taper relief applied to them? or..

Would the £325,000 allowance be applied to the cash gifts first. So no taper relief. With any balance of the allowance being added to the £175,000 house allowance, leading to tax being due on the balance of the value of the estate?

NorthYorkie

The £325K nil rate band will be applied firstly to the cash gifts in the 7 years prior to death, in chronological order. Any balance left over will be set against the estate on death.