Am I being daft or have fiancée's parents misunderstood inheritance tax?

[countrywalks1]

So my almost in laws often pay for my fiancée's stuff, uni etc. They've been dealing with my almost nan in law so I think are now more clued up around inheritance tax etc.

My fiancee is moving for a few months to another city for work, and they kindly offered to cover half the rent whilst I stay at our own place (I've always paid my half).

However they want to pay the money directly to the landlord, as opposed to transfer to my fiancee who can then pay as normal. I suppose it makes no difference, but my understanding is that they can do whatever they like with their money, so also could do a lump transfer across to my fiancee rather than spoon feed to the landlord.

I think they think they might get taxed if they do the lump transfer route however. Am I wrong/have I misunderstood something?

I thought you only got taxed on gifted money if someone died with a few years of having gifted it, I don’t see any issue with them paying his rent if they’re generous enough to do that.

If they die within a certain number of years and have gifted over a certain amount per year (£3k I believe) then HMRC can come back to claim inheritance tax on those gifted amounts.

www.gov.uk/inheritance-tax/gifts

Only if they die in the next 7 years.
And this says they can make regular contributions to a child's rent.

I was just about to post the same link

I think you can gift surplus income to anyone up to something like 6k a year or lump sum gifts up to 3k tax free.
Above that you could be liable for inheritance tax but that tapers down over 7 years too

Paying the landlord directly means it (probably) wouldn't be counted as a gift to your fiance. Inheritance tax is payable, to a certain extent, on money given to the heirs in the last seven years before they die.

So it doesn't save them tax. But if they die in the next seven years, it could save their estate (effectively their heirs) tax.

I think - and we obviously need someone who really knows to come along - that if goods or services are paid for and are paid for from regular income not dipping into savings then even if the person who paid dies within seven years then the payments will be exempt from IHT.

It sounds like the same reason (if I've relayed it correctly) as to why you get wealthy grandparents paying private school fees, for example.

Agree with comments about tax. Doesn’t matter if trickle or lump sum as it’s always calculated on annual tax year basis.

I think they probably want to pay the landlord directly because that way they know the money will be used for rent and they might even be your finances guarantor on rent contract because if they are paying half his rent, he might actually not meet affordability criteria to rent the place on just his income alone.

Thank you for the speedy replies! I have already seen the gov info about it all - agree it makes sense when you look at it from an inheritance point of view, but they're only in their mid-50s! I very much doubt (and obvs hope not) that the 7 year problem will be an issue!

I see how there's little practical difference between them giving us the money and them paying directly. I suppose my issue is that it's all a bit of a fake legal issue surely?

If any tax investigator was really THAT fussed about what amounts to around a £4000 gift (ie £1000 over the 3k limit) they'd obviously see that my in-laws' money was paid to a landlord for a property that was rented for someone else. We don't have guarantors or anything. I'm trying not to be flippant but it's a bit silly right, trying to be so sneaky right?

We are in our 50s and definitely take into account inheritance tax implications when giving money to our DC.
You never know whe your number is going to come up.

I see how there's little practical difference between them giving us the money and them paying directly. I suppose my issue is that it's all a bit of a fake legal issue surely?

Because it’s their money and paying the landlord directly is easier surely, why make two transactions when one will do?

I don’t know what you mean about fake legal?

There’s nothing particularly odd about this transaction at all, legal/tax or otherwise, especially as you point out yourself that the 7 year rule over inheritance tax is unlikely to be an issue anyway.

I don’t really understand why you think it’s sneaky?

Nothing sneaky about what they are doing. But sounds to me that they don’t trust your fiancé not to fritter away the money, which is why they are paying the landlord directly, rather than any inheritance tax issue.

Or, if they are making the payments so that it’s under the exempt regular payments such as rent for a child which is mentioned on the HMRC link above, that’s not sneaky, it’s canny.

If they give the money to him to pay out in rent, won't he have to pay taxes on that money? I don't know UK law, but in the US I can directly pay for rent, medical bills, etc. for my adult DC but if I give them the money to pay it themselves, they are taxed on it.

Talk to people you know in their mid-50s and most of them will have known someone their age who has already died, and normally with not much notice. So even if it weren't simpler to just pay the landlord directly (I don't see why it wouldn't be), it's sensible to cover all the bases.

its not sneaky its called tax planning and its smart to be on top of these opportunities.

My mother died at 33 and my step mother 62, you can’t assume someone will be here for 7 years!

It makes perfect sense what they want to do and unless your DP is planning to not use the payment for the rent, it makes zero difference to your DP.

Not read all the replies.
Regular gifts out of excess income are allowed tax free, as long as it comes from excess income rather than capital. There are other conditions such as not reducing standard of living.
The above is in additional to £3k per year gift limit ( which can be backdated one year to £6k) and £5k on marriage.

Regular payments out of excess income
And
£3,000 per year
You are worrying unnecessarily, just be grateful OP.

@Beamur

I think you can gift surplus income to anyone up to something like 6k a year or lump sum gifts up to 3k tax free. Above that you could be liable for inheritance tax but that tapers down over 7 years too

You can gift surplus income ( as regular payments) And £3k per year.

It's not sneaky and it's sensible because it's separate to the £3k limit.

Originally you said you thought they didn't understand, now you're saying they are sneaky. What are you digging at or looking for?

I come from a family where elderly relatives give large sums of money in cash in brown envelopes. Who told me not to pay it into the bank They are not linked to the mafia at all. Just cautious of the tax man.

If multi billionaires can invest their money in ways that allows them to avoid paying £20 billion in taxes, I'm not going to resent my granny doing something to save my parents 20 quid in a decade.

Do your homework on this. My relative's probate is still rumbling on almost 18 months after their death due to bad advice.

I think as a mid fifties person that if I offered to help my adult DS with his rent for a period I would just set up a DD with the landlord for the agreed finite period and be done. I would likely be the guarantor for that rent if DS’s income was poor so I would want to ensure he had a roof over his head.

I wouldn’t be keen to advance gift him a lump sum and I’m unsure why you are so concerned unless you were hoping to see a lump sum.

I would be mightily pissed off if my DS’s partner considered me incapable of working out my own financial affairs especially since she is probably in her 20s without much accumulated wealth of her own.

Accept the gift with grace in whatever form it comes and mind your own beeswax.

@PlumManor

I think as a mid fifties person that if I offered to help my adult DS with his rent for a period I would just set up a DD with the landlord for the agreed finite period and be done. I would likely be the guarantor for that rent if DS’s income was poor so I would want to ensure he had a roof over his head.

I wouldn’t be keen to advance gift him a lump sum and I’m unsure why you are so concerned unless you were hoping to see a lump sum.

I would be mightily pissed off if my DS’s partner considered me incapable of working out my own financial affairs especially since she is probably in her 20s without much accumulated wealth of her own.

Accept the gift with grace in whatever form it comes and mind your own beeswax.

Fabulous post .