Inheritance Tax and Gifts

[AutumnDragon]

Can anyone advise on inheritance tax?

3 years ago my Mum gave us a large sum of money to convert part of our property into living accommodation for her. She sold her house and the rest of her money is in savings.

Sadly, it looks like she won't be with us in six months and she is now fretting about the tax implications to us for the conversion money as it is under the 7 year rule.

Does anyone know if the conversion money will be taken as part of her estate? If it is, she goes over the inheritance tax threshold, if not, she probably won't be. The money was solely used for the conversion and we have receipts for most of the money (at least 95% of it). The conversion will have added value to our house, but if we were to sell soon, we wouldn't recoup the whole amount (we are not looking to sell for at least 5 years)

Hope that makes sense

Yes if she gifted you money and dies within 7 years it will become part of her estate - however, it would be tapered

If your Mum has been living in the converted accommodation without paying full market rent, then it is likely to be seen as a Gift with Reservation, so the tapering will not apply.

The current limit for Inheritance Tax is £325k or £500k, if the estate includes your home and you leave it to your children or grandchildren.

Any IHT to be paid on the GWR would usually come out of the estate, along with any other IHT, before it is distributed. Your Mum might well benefit from an appointment with a professional, so that she and you don't worry unnecessarily.

@BirdsBirdsBird

If your Mum has been living in the converted accommodation without paying full market rent, then it is likely to be seen as a Gift with Reservation, so the tapering will not apply.

The current limit for Inheritance Tax is £325k or £500k, if the estate includes your home and you leave it to your children or grandchildren.

Any IHT to be paid on the GWR would usually come out of the estate, along with any other IHT, before it is distributed. Your Mum might well benefit from an appointment with a professional, so that she and you don't worry unnecessarily.

She is paying towards running costs but that is it.

Thank you for your help, sadly it was not the answer we wanted.

Out of curiosity, if she had paid the workmen direct rather than transferring the lump sum to us, would this have affected the rules?

If she was married to your father when he died and he left everything to her, she can also use his allowance, so £1m in total including the property. And (tapered) tax is only due on the bit over £1m. Why is this causing her worry?

first of all there is a threshold so how much is the total estate?

Out of curiosity, if she had paid the workmen direct rather than transferring the lump sum to us, would this have affected the rules?

Yes, did she?

@dorkfink

first of all there is a threshold so how much is the total estate?

The house was sold 3 years ago so we're looking at the £325k threshold. Only Mum, they divorced a number of years ago. She has also given gifts to us and my brothers so added all together it will be in the region of £340k.

She gave us £60k to convert the property for her needs as she didn't think of it as a gift so wasn't worrying about the IHT implications of the gifts etc (and didn't expect to be going so soon). If you take the 60k out, then she doesn't fall under IHT.

She is a born worrier, bless her. She was worried that we would be landed with a big tax bill so we would be out of pocket on our "good deed". She also knows one of my brothers will make it difficult but I can handle him

We will be getting professional advice on her will, but I was hoping to settle her worries by asking on here. I'll tell her that the tax will come from her estate and not from us, that will stop her worrying I think.

@Brideandprejudice

Out of curiosity, if she had paid the workmen direct rather than transferring the lump sum to us, would this have affected the rules?

Yes, did she?

Sadly not, but it was an option at the time so I was just curious.

It's also on sliding scale, so you pay less if it's 6 yrs vs 1 yr if that makes sense.

Just checking the facts:
Your mum’s total estate including the £60 K is £340k.
Your mum owned her own house and sold it 3 years ago.
She has a will leaving her estate to her children, you and your brothers.

If so she may still be able to use the RNRB (up to £175k) to cover her whole estate. www.gov.uk/guidance/how-downsizing-selling-or-gifting-a-home-affects-the-additional-inheritance-tax-threshold.

Also remember that:
you can normally deduct funeral expenses before calculating the estate
You only pay 40% on the estate above the inheritance tace threshold e.g. on £340k, the first £325 is tax free the remaining £15 k is liable for £6k inheritance tax so net estate would be £334k.

Any IHT gets paid by the estate anyway, so you won't have to pay it.

Mum was worried that I would have to pay tax personally. She had googled it and found a page that seemed to suggest that the person receiving the gift would have to pay IHT and not the estate. I have told her what everyone has said on here and we have talked it through and she is a lot happier.

When we were talking about it she said that she had sent the money to me so I could deal with the tradesmen to save her doing it, and that I did not gain from the money so it wasn't a gift. The alterations will not make much of a difference to the value of our property so we won't have that to worry about at a later date.

She's happy now that even if it is taken into account, then the IHT will come from her estate and not from me.

Thank you everyone for helping us think this through.