IHT403 - £3,000 carry over and earlier gifts

October22Mover

Hey all,

Am puzzling through IHT403 with my siblings and I have some questions. Sorry for the long one, have hopefully laid it out clearly.

Just a note now given the years involved below - my mum died 2 years and 11 months after giving us all substantial gifts from selling her house, so taper relief doesn't apply.

Small gifts and £3,000 carry over

As you can't apply the £250 small gifts allowance and £3,000 tax free allowance to the same person:

If a parent gave you £250 one year, and the next year gave you £6,000, would you deduct the £250 of the previous year from the tax free allowance?

How to apportion £3,000 allowance on form

I read somewhere you need to apply the £3,000 relief to the earliest eligible deduction. Is that right?

Say in this scenario eg. (amounts/dates are illustrative)

2022/23

• I received £250
• My brother received £250
• My sister received £400

2023/24

• May: I receive £10k
• June: My brother receives £10k
• July: My sister receives £10k

Is this acceptable:

I treat the 22/23 payment as a small gift. I apply the £3,000 relief for 23/24 only to my £10k.

My brother treats the 22/23 payment as a small gift. He applies no relief carried over to 23/24.

My sister deducts the £400 she received in 22/23 from the £3,000 allowance. She applies £2,600 carry over relief to her £10k gift.

Including smaller gifts where relevant

The form says NOT to list out gifts for years where less than £3,000 was gifted total. But I imagine if we are going to carry over only part of the allowance from the previous year, we'll need to do it for that year at least?

Earlier transfers (box 18, 19)

Why do they need details of gifts from a full seven years before the earliest one detailed on the form? It's highly unlikely there's any years gifted over £3,000 before 2023, as my mum had no money before she sold her house, but just want to understand why they need this. It would be very difficult for us to find that info.

Keep_pedalling

If you make small gifts in one year and then give the same person £6000 the next then you have exceeded your annual exemptions over the 2 years by £250.

In the example you give there is only £2100 carry over left if you give to the same people so the first gift of £10k whites out your allowance and £4,900 is subject to the 7 year rule, the second and third £10k gifts fully fall under the 7 year rule.

None of the people pay any IHT on this, if there is any to pay it comes out of the residual estate.

October22Mover

https://forums.moneysavingexpert.com/discussion/comment/82044958#Comment_82044958

Okay just so I understand, you're saying if someone is gifted £250 one year, and then a gift worth over £250 the following year, the previous year can't be claimed as a small gift even if the tax free allowance from that year is being applied to payments to other people?

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/82045118#Comment_82045118

No, I am saying you can’t make a small gift to a person and then carry over the annal exemption and gift it to the same person the following year, as you will have effectively gifted that person £3250 for the first year.

Is your estate actually IHT territory? If it is why are you making such small gifts in one year?

Dead_keen

Some comments:

1. The executors have to apply the exemptions to the deceased's gifts. So saying "I treat", "My brother treats", etc is not the right way of looking at it.
2. If I ignore other exemptions (like gifts out of income) then you would use the £250 exemption first.
3. So that means that for 2022/23, the only gift not covered by the £250 exemption is the £400 one to your sister. None of the gifts in the following year can benefit from that exemption.
4. The £3,000 annual exemption is for the deceased, not per recipient.
5. In 2022/23, £400 of it is used and so there is £2,600 to carry forward
6. In 2023/24, there is a £3,000 exemption for the year and the £2,600 balance for the previous year.
7. If the gifts are made on different days, apply the exemption to the earliest first (e.g. your May one). If on the same day then apportion it between the gifts based on value.
8. So based on your made up numbers dates, of the £10,000 gift to you £4,400 is potentially subject to IHT, as are the two other £10,000 gifts
9. If these gifts fall below the IHT threshold, no IHT is paid by the recipients of the gifts. If the real numbers are bigger (so that the gifts exceed the total of the nil rate bands) then the recipient pays IHT on the excess. Any IHT due on the value of the assets on death is paid by the estate.
10. Why does HMRC want details of gifts before the first of the seven year ones? In your case it is neither here-nor-there but it can, for example, change the tax that is due on, for example, gifts made to trusts.
11. In relation to: "Okay just so I understand, you're saying if someone is gifted £250 one year, and then a gift worth over £250 the following year, the previous year can't be claimed as a small gift even if the tax free allowance from that year is being applied to payments to other people?" No, that is completely wrong. They are independent of each other across tax years.

October22Mover

https://forums.moneysavingexpert.com/discussion/comment/82045155#Comment_82045155

Yes, my mum had a house, and the value of the house means all cash gifts in the seven years before death are potentially subject to inheritance tax.

It looks like i'm getting two conflicting answers - you've said we would carry forward £2,100, the other person has said £2,600. So I'm now unclear as to the reasoning on both counts.

Appreciate the actual amounts of tax involved here are relatively small fry but I want to get it right on the form so we don't face delays via additional queries from HMRC.

October22Mover

So that means that for 2022/23, the only gift not covered by the £250 exemption is the £400 one to your sister. None of the gifts in the following year can benefit from that exemption.

The £3,000 annual exemption is for the deceased, not per recipient.

In 2022/23, £400 of it is used and so there is £2,600 to carry forward

@Dead_keen This is where I'm getting stuck. I'm aware the £3,000 annual exemption is not per recipient and that's the logic I've applied in my example.

If my mum gifted someone £250 in one year and then £6,000 to the same person in the second year, she could only carry over £2,750 of the tax free allowance to the second year on that payment, because you cannot apply both the £250 small gift allowance and the tax free exemption to the same person. This makes sense to me.

However, if my Mum gifted someone £250 in one year and then £10,000 to that same person the next year. And then another £10,000 to someone else, @Keep_pedalling seems to be saying she can't carry over that final £250 and apply it to any gifts to anyone. Which I'm willing to accept but I just want to be certain that's right.

Keep_pedalling

First off appologies for misreading your opening post, I had a senior moment there thing you were talking about your gifting 😳

Just checking, have you taken into account her residencial nil rate band? If she was a widow have you taken the transferable NRBs from her husband’s estate. Sorry if they sound like basic questions but a lot of people are not aware of these newer exemptions.

October22Mover

https://forums.moneysavingexpert.com/discussion/comment/82045194#Comment_82045194

All good! Can't imagine this heat has any of us firing on all cylinders.

My parents separated several decades ago and never married each other or anyone else, so that side of things doesn't impact us.

The only beneficiaries of her assets including her house are her children, so the nil band rate is at £500k which will be eaten up by the value of the house. She sold her last house a few years ago and divided up the difference between the sale price and purchase price of the new place between her three children, which is those big payment that we're trying to unpick.

She spent most of her life very cash poor until the house sale so I don't think she ever gave much thought to IHT planning and her death was premature and unexpected. At the time, it seemed very likely she'd live well over 7 years beyond those gifts. Not that her situation is hugely complicated, it's just this gift stuff that we need to work through a bit.

Dead_keen

If my mum gifted someone £250 in one year and then £6,000 to the same person in the second year, she could only carry over £2,750 of the tax free allowance to the second year on that payment, because you cannot apply both the £250 small gift allowance and the tax free exemption to the same person. This makes sense to me.

While things may make sense to you, that's unfortunately not relevant to IHT.

The exemptions work on a tax year basis. If in tax year 1, the £250 small gift exemption applies to the only gift of £250 then that is the end of that gift as far as IHT is concerned. It doesn't exist and so is just ignored (**). So when applying the £3,000 annual exemption in tax year 1 there are no gifts to set against the £3,000 and so the whole of the £3,000 exemption for tax year 1 is carried forward to tax year 2. If in tax year 2, a further gift to the same person is made of £6,000 then the whole of that £6,000 is ignore because of this year's annual exemption and the previous year's one that is carried forward.

** The legislation is a bit more geeky that this in that s20 means that the small gift transfer of value is an exempt transfer of value and so no longer a transfer of value for s19's annual exemption and hence ignored. In other words, you apply the small gifts exemption before the annual exemption. HMRC's manual supports the view that the annual exemption is the last one you have to worry about.

poseidon1

I am in agreement with the @Deadkeen's detailed analysis of the scenario you posited.

The £250 small gifts exemption is a 'cliff edge' in that any gift that exceeds that amount either eats into the £3000 annual exemption or becomes a Potentially exempt transfer.

Hence in the 2022/223 tax year your sister 's £400 gift reduces that year's £3,000 exemption to £2,600 leaving a total of £5,600 to chronologically apply to your £10k gift in 2023/2024 tax year.

HMRC internal guidance below hopefully helps clarify how the small gift exemption works -

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14180