Financial gift, inheritance tax and 7 year 'dying' rule

[Parques]

Please help: I am gifting my son £115, 000 to buy a house (life savings, deaths in the family etc - I'm not loaded!). Am I correct in thinking that if I die within 7 years of the date of the gift he would be liable for 40% tax on the £115 grand. Or, is it ok because it is within the £325 grand inheritance tax allowance? This is causing much consternation between my husband and I! Thank you

It depends on whether your estate is above the IHT tax free allowance (if below, there’s no tax to pay) and whether you or your husband dies first. If you die first and your husband inherits from you then your surviving husband has no tax to pay as he’s your husband.

As the £115 is within the IT threshold there will be no tax to pay, rules with examples are here. That’s assuming you haven’t given away more that would take this gift over the threshold.

www.gov.uk/inheritance-tax/gifts

If your entire estate including the gift (tapered down according to how long you live for) is within the IHT threshold then no tax is payable.

Unless yours and yours husbands combined estate is worth over 1mil there is no IHT issue.

The correct answer is that if this is the first capital gift you have made and you die within 7 years, it will be treated as coming out of the £325,000 Standard Nil Rate Band first.

Your son will have nothing to pay on that gift. Once 7 years has passed, your Standard Nil Rate Band will be increased back to £325,000 from £216,000. I know £325,000 less £115,000 equals £210,000, but for the next 7 years your band will have only reduced by £109,000 because of the annual gifts allowance of £3,000 for this year and last year. It sounds as if you do not use that so that will apply also.

It is not just inheritance tax you have to worry about. Should you need to go into a care home, they look at whether you have deliberately depleted your assets to avoid having to pay towards your care costs.

A much bigger risk is that your son will lose some of the money / house in a bad marriage. So you also need to look at how you can protect that - such as a pre nup.

My friend didn the same for her son and she took a charge over the property, which protects the original sum. In your case that would be the £115 K. There’s no way of protecting any capital gain after that amount in a divorce.

BTW I say it’s a bigger risk because it’s about one in three chance that (if he marries) he will end up divorced. Unless you are elderly or unwell you probably have a more than 66% chance of surviving 7 years.

There’s no point in protecting the 40% from HMRC but not the 50% that could go to his ex after a short marriage.

@Lincslady53

It is not just inheritance tax you have to worry about. Should you need to go into a care home, they look at whether you have deliberately depleted your assets to avoid having to pay towards your care costs.

This should not be a risk if there was no indication of care needs when the gift was given.

And if the OP is concerned about IHT on the gift (which sounds as if it is possible because of an inheritance of her own) she probably has a house or other assets that sh thinks will attract IHT.

But in principle it is a factor to look at.

@Lincslady53

It is not just inheritance tax you have to worry about. Should you need to go into a care home, they look at whether you have deliberately depleted your assets to avoid having to pay towards your care costs.

Not if OP is fit and well now they wont

Get some financial advice from a planner.

@RainingYetAgain

Get some financial advice from a planner.

What is that going to do? OP is giving cash to son to put into property.

Thanks all for the wise advice. Very grateful to you all

What is that going to do? OP is giving cash to son to put into property.

Look at the bigger picture of her overall Inheritance position. Ensure she gives it in a way that minimises IHT.