Gifting when under IHT

SoJo

I've been reading to lots about the IHT and the gifting rules and listened to Martin's podcast and TV show about it. I understand the IHT thresholds including when one's IHT is passed to their spouse. I understand the rules about gifting money in relation to the £3k and £250 amounts and any larger sums of money you would have to live 7 years (sliding scale) for it not to be included for IHT.

What I don't understand and doesn't seem to be discussed is when someone's estate is under the IHT and they gift someone more than £3K. For example say my is £300K between a property and savings etc. Therefore under the IHT. I give £10K to my sister making my estate £290K. I then die a year later and my estate is still £290K. Would my estate have to pay IHT on the £10K I gave to my sister while I was alive because it's less than 7 years? Or is there no IHT to pay because when I gave that money my estate was under the IHT?

I hope that scenario makes sense.

Technosaurus

I too am intrigued by this @SoJo so I am commenting not just with my own thoughts but also to see if I've misunderstood.

As I understand it, everybody in the UK gets £325k IHT free. This can increase depending on circumstances but let's keep it simple.

So if your estate was £290k, it wouldn't be troubling the taxman and your £10k gift to your sister takes your declared estate (ie value of your estate + gifts in last 7 years) to £300k for probate purposes, which is under the threshold….. as I understand it there would be no IHT payable at all on your example.

This is based on a worked example here: https://www.gov.uk/inheritance-tax/gifts

(Worth also noting that IHT on gifts is payable by the recipient, not the estate from which it came, so even if there was IHT payable your sister would pay it, not your estate)

I'd be interested to know how it works when the limits are breached. If someone had an estate of £525k, so £200k is "taxable", but they gave away £13k to their sister the day before they die with no other gifts made that tax year…. to my simple mind it's IHT of 40% on the £200k taxable from the estate (£80k) + the sister must pay 40% tax on the £10k over the £3k allowance (ie £4,000 from the sister too)?

But I might be wrong…

Woodstok2000

The gifts can be considered part of your estate if you die within 7 years, but that doesn't change your IHT liability.

Gifting from an estate that's under the IHT limit has no real impact, unless your circumstances change before your death and you have more assets than expected.

HappyHarry

https://forums.moneysavingexpert.com/discussion/6660291/gifting-when-under-iht

If your estate at present is £300,000 and you give away £10,000 now and your estate is £290,000 at death then there will be no inheritance tax to pay by anyone.

Using your example, you gift £10,000 to your sister now. Next year, you pass away and your estate is £290,000. Your Nil Rate Band of £325,000 is reduced by the £10,000 you gave your sister, and is now £315,000. As your estate of £290,000 is less than your Nil Rate Band of £315,000 there is no inheritnance tax to pay.

Gifting cannot increase your estate's IHT liability.

Just to note - in the above case the first £3,000 you gave your sister might be exempt anyway as an annual exemption, and that exemption might also be able to be rolled back one year, meaning that the gift to your sister from an inheritnace tax point of view might only have been £4,000.

mta999

If the gifts or gifts are within 7 years of death then simply add them back to the estate value (as if the money was still there in the estate)

bobster2

https://forums.moneysavingexpert.com/discussion/comment/81928338#Comment_81928338

In this you have stated "(Worth also noting that IHT on gifts is payable by the recipient, not the estate from which it came, so even if there was IHT payable your sister would pay it, not your estate)"

This is not correct in most circumstances. Gifts initially just use up the nil-rate band available to the estate - so potentially increasing the amount of IHT paid by the estate.

However, if the amount of gifts is large and exceeds the NRB available (i.e. > £325,000) then liability to pay the IHT beyond this shifts to the gift recipients.

Albermarle

https://forums.moneysavingexpert.com/discussion/6660291/gifting-when-under-iht

Just one correction of a very common misunderstanding.

nd any larger sums of money you would have to live 7 years (sliding scale) for it not to be included for IHT.

The 'sliding scale' better known as taper relief, only applies in a minority of cases where very large gifts are involved, that are above the nil rate band. Normally if you die 6 years and 364 days after making a gift, then it is counted back into the estate 100%.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81929121#Comment_81929121

However, if the amount of gifts is large and exceeds the NRB available (i.e. > £325,000) then liability to pay the IHT beyond this shifts to the gift recipients.

Although AIUI, in practice the estate normally still picks up the tab. HMRC are not concerned about the source, as long as they get the full amount payable.

Technosaurus

https://forums.moneysavingexpert.com/discussion/comment/81929571#Comment_81929571

Interesting… So, for someone with a £325k NRB am I right in saying:

If they gift £525k tomorrow and survive another 5 and a half years…. there would be 16% payable on the 'taxable' £200k (ie £32,000)?

But if they gift £100k tomorrow and survive the same length of time, that £100k simply reduces the NRB to £225k for the rest of their estate?

HappyHarry

https://forums.moneysavingexpert.com/discussion/comment/81930942#Comment_81930942

Yes.

To be clear, the £525k gift reduces their NRB to £0 too.