Inheritance tax

[Cileymyrus]

Who pays it?

if the estate is split equally between 4 grandchildren, but 2 are given the money prior, and the grandparent lives less than 7 years, what happens?

is the tax split between all 4 grandchildren, or only the two that received money?

Yes any money given before 7 years will be counted as part of the estate and taxable. They will need to pay 40% back (or less, depends how many years ago it was given)

Thank you.

been doing some reading and it would seem that IHT is only over £325k, and gifts are included first?

so if two grandchildren have received £150k each, that portion is excluded, and IHT is due on the rest of the estate.

so say there’s another 325k left when the grandparent dies, that is taxed at 40%, leaving 195k to be split between the 4 grandchildren, if they leave the will as equal split.

I wish people would sort their affairs properly.

To correct the previous poster slightly, the recipients of the gifts only have to pay IHT if the grandparent has given away more than £325k in the 7 years prior to death. If the amount given away is less than that, any IHT is paid by the grandparent's estate.

Your calculation is slightly wrong. In your scenario, there is still £25k of nil rate band available after deducting the £300k gifts, so the estate would have to pay IHT on £300k, leaving £205k to split between the grandchildren.

Note that the first £3k grandparent gives each year is exempt. Note also that there is taper relief on any gifts that were more than 3 years before death, reducing the amount of IHT payable. There are some other exemptions as well, such as gifts for weddings/civil partnerships of up to £2.5k for grandchildren and regular payments to help with living costs.

Also, if the grandparent's spouse did not use all of their nil rate band, anything that is left can be transferred to the grandparent, potentially giving them up to £650k nil rate band. If part of the grandparent's estate is a home which they leave to their grandchildren, there is an additional £175k added to the nil rate band (provided the equity in the property exceeds £175k). If the grandparent's spouse left their property to the surviving grandparent, that adds up to a further £175k to the nil rate band. So there is potentially up to £1M before any IHT is payable. In your scenario, it is therefore possible that there will be no IHT to pay.

Thanks, so while the two grandchildren who haven’t received the money yet are a bit screwed, at least they won’t be on the hook for IHT.

another question- if the grandparents house is sold before she dies (husband died long time ago) and moved in with her son, can he use the money from the house sale to extend their house, even if it’s perfectly adequate for their needs - 3 bed semi - plans are loft extension with separate bed and bathroom, single story kitchen extension. Around 200k of work. Only 2 of them living there.

grandparent is still saying they want the money from the house split on sale, but son says it’s needed for care.

Unless the grandparent is unable to make their own decisions, her wishes must be followed. She can do whatever she wants with the money if the house is sold, including giving it to her son to extend his house. This would, of course, be another lifetime gift that could attract IHT unless she takes part ownership of the property.

And if the son is “managing” her money for her and won’t follow her wishes, saying she doesn’t know how to budget and the money is needed for care? He has her bank cards and controls access, while she still seems competent she doesn’t have internet access, and can’t get to the bank herself. I don’t think she would notice if someone was taking money/not following wishes.

what steps would we need to take to ensure the wishes are followed? Would we need a solicitor? Report to social services? How would we proceed once the house is sold to stop him just taking the money and getting the planned work done?

can we insist she’s given part ownership reflecting the money she’s put into the son’s house

thanks for your help, we’re a bit stuck as son is telling us he knows what she needs, she is going along with it for an easy life.

Gifting the money could be seen as deprivation of assets so keeping it would make sense.

Using some of the money to extend a property to make it more suitable for the grandparent e.g building an Annex etc. is appropriate but I would strongly recommend seeing a solicitor and putting a Deed of Trust in place. This can cover a whole range of scenarios e.g. lifetime interest for son, but grandchildren inherit, what happens if son dies e.g home sold and money used for grand parent etc.

Managing money, an LPA may be appropriate again I would strongly recommend seeing a solicitor. If there are concerns about financial abuse Age Concern and SS can help.

my understanding is

lets say grandparent has total assets worth £500K (mostly house)
GP gives 100K to child A, 100K to child B and keeps 300K.
GP dies 1 year later.

for IHT purposes, you consider the 100K gifts to child A and child B as if that money is still part of the estate. so the total estate is still worth £500K and IHT is due on the amount over £325K, that is, on 175K. The tax man takes 40% of that,, ie. 70K. leaving 430K in the estate. That 430K can then be divided up between the 4 children according to the will. so child A and child B get an extra 7.5K and child C and D get 107.5K

overall, child C and D should not lose out from the gifts given to A and B. but it will depend a bit on how the will is worded and the timing.

In terms of selling GPs house / extending brother's house, talk to a lawyer.

This is wrong. To start with the IHT calculation, as the estate is mostly a house and is being left to direct descendants, there would be an additional nil rate band of £175k, taking it to £500k total. There would therefore be no IHT to pay.

The proposed distribution of the estate is also wrong. The gifts form part of the IHT calculation. They do NOT form part of the estate. So, in this scenario, there would be £300k to be split four ways (given that there is no tax to pay). Assuming the will specifies that the children get equal shares of the estate, they will get £75k each. Including gifts, child A and B each end up with £175k, child C and D each end up with £75k.

If son is going to ignore her wishes and spend her money on improving his house, that could be financial abuse. Taking money without her knowledge could also be financial abuse. As a previous poster says, contact Age UK and/or Social Services.

Regarding taper relief, it only applies when the total value of gifts distributed prior to a death exceeds the NRB allowance, not if the gifts fall within the allowance.

Does the son have Power of Attorney? He may well be acting illegally if not. Look into the Court of Protecton, but it can be costly.

Thank you all for your help, it’s very useful.

we have no idea of POA. even if son does have it they still have to abide by wishes unless they’re not in best interest?

If the son argues that the home improvements are necessary for his mum to live there, does that make a difference? Will he have to prove that he needs to spend that amount of money if the house was already adequate, and there’s no adaptations for mobility.

I might give age concern a call. Will that trigger any investigations or social services referrals?

If the son has LPOA, he can make financial decisions if:

• the parent no longer has mental capacity
• the LPOA says he can
• the parent gives him permission

He must keep the parent's finances separate from his own and act in their best interests. He would be on very shaky ground if he spent a large sum of the parent's money on making improvements to his house that were not necessary for the parent's welfare.

Thanks.

it does seem as though the son isn’t acting according to wishes/in best interest. So next step is how to intervene which is never easy.