Inheritance tax difference of opinions

poseidon1

Howarewetoday said:

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?

Useful additional information with regard to assumed current surrender value of what sounds like a joint life 2nd death policy ( if wife is an additional party).

If that policy is gifted followed immediately by the 1st £40k instalment then £240k of the boss's NRB utilised in year 1.

By year 4 a further £120k would have been gifted and the cumulative gifts at that point would be £360k. Death at that point would leave £35k minus £3k ( annual exemption) exposed to IHT directly on the beneficary daughter but still no taper relief since the final £40k gift was less than 3 years before death. Therefore £32k subject to 40% IHT with no relief.

If death before elaspe of year 7, at that point £155k ( approx) exposed to IHT with £40k of which attracting the 3 year tier of taper relief ( 32%).

The residence nil rate band of £175k is unlikely to be a feature here until the 2nd death of the wife, in which case her £175k together with her husband's transferred £175k are available to set against IHT on her estate. How much of the husband's £325k will also be transferable to wife's estate will depend exactly when he died during the above gifting cycles.

In summary, bringing the gift of the valuable insurance policy into picture this raises the possibility of a small measure of taper relief arising on the quantum of gifts proposed assuming death at the 7 year point.

Bearing in mind taper relief only becomes an issue after 3 years have elapsed , the boss would have to consider much higher annual cash gifts than the proposed £40k, over and above the gift of the insurance policy if he wants the possibility of significant taper relief to arise in favour of his daughter.

One assumes the estate in question is considerably above £1 million threshold even allowing for business property relief on the value of the business ( if this has a separate value of its own). If estate appears to measurably exceed the £2 million mark, residence nil rate bands would taper away, so making substantial cash gifts pre death could indeed be sensible IHT mitigation in this case.

sheramber

Howarewetoday said:

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?

So, it the case of the boss, if his house wasn't married 

Do you mean the boss is not married?

Howarewetoday

Typo - I'm told that the boss is in fact married just in case this also doubles up a dating site. And if it doesn't!