Inheritance tax and gifts

[PicpoulDeMeNay]

I'm trying to help my DM sorting out finances as my DF has now moved to a care home. She's not really got involved in this in the past, but now needs to!

I'll write the basics here, excuse blunt bullet point format but easiest way to get it down.

Ultimately I know we may need advice of some sort - but not sure if that legal, tax or financial!

So, here goes:

• DF, 80, has had a stroke and now in a care home permanently sadly
• DM, 75, good health, lives independently in their home
• DF's care home fees are (just) covered by his work pension and state pension
• DM has no pension, but will get 50% of DF's work pension if he passes first (for which we are making a massive assumption given health)
• assets = house £450k, various bank accounts £900k = £1,350,000 currently
• DM's monthly outgoings are c£1200pm. For now she will need to fund herself via cash in the bank

Concern from her (and me and DSis) is potential future IHT liability. Currently, if we were to lose both of them my understanding is IHT would be £1,350,000-£650,000 IHT allowance (one lot of £325k passing to the other) = £700k*40% tax = £280k tax bill.

She is thinking of making us a substantial cash gift of £200-£250k each. In return we would put half each aside for any future care home fees for mum, or other contingencies.

As we understand it, there is a 7 year rule. So if she gifts us - including a written statement it's a gift (does this have to be witnessed?) - this money now, if she is still here in 7 years, there's no IHT due, and if sooner, it's on a sliding scale? Is it as 'simple' as that?

I hate having to have these conversations, with her, but she's quite pragmatic and wants to do the right thing as she describes it!

PS. we have medical and financial LPA's in place already should they be needed. DF and DM to each other, and me and DSis to both parents.

Many thanks in advance.

If the property is left to either children or grandchildren they will get an additional nil rate band of £175k each, giving a total of £1m tax free allowance.

I believe she could be better paying a regular bill for you - so you are dependant on her paying your gas bill etc. Or for your kids dance class. But you would want to check out the rules on that too.

There is a taper on gifts. After 3 years the IHT liability reduces each year, until after 7 years the PET succeeds and is no longer counted back into the estate at the death of the donor.

The other thing is that any growth in the gift is Not included in the liability. Whereas if it stays in the parents' estates there will be tax on the growth at death.

A note from the donor about the gift will do. When I have gifted money to DCs, I just put GIFT in the transfer reference.

But I really really think you need advice from a tax adviser.

@LittleOwl153

I believe she could be better paying a regular bill for you - so you are dependant on her paying your gas bill etc. Or for your kids dance class. But you would want to check out the rules on that too.

Someone can make Regular Gifts out of Income. Also, there are some gifts that can be made with no IHT - £3,000 a year I think, plus any number of £250 gifts to individuals, Of course there is nothing stopping someone giving as much as they wish.

AIUI if they die close together, the IHT on the second inheritance is reduced.

Again, consult a professional. And as well as tax, they should know about Care Home funding as well.

I think that is broadly right OP, except you can add in the house allowance assuming she leaves to you and dsis, this will take you to £1mm iht free. So iht due as 40% x 350k.

Thanks all.

I wasn’t aware of the additional house allowance, which is a good point. Wills leave everything to me and my DSis when the second parent passes, bar some charitable donations.

I was aware if the gifts bit, but wasn’t sure if the £3000 is per person per year or just as a total. I believe also if you haven’t used the allowance the previous tax year, you can use if this tax year.

Although to be fair, in the scheme of it, those amounts may not help the IHT liability!

I do realise we are very fortunate to potentially be in this position, and will definitely now try and find a tax adviser for mum locally.

The £3,000 is per year but can be backdated one year so £6k first year and £3k each subsequent tax year .
£5k wedding gift per child

I do realise we are very fortunate to potentially be in this position, and will definitely now try and find a tax adviser for mum locally.

Or you could choose to pay the tax you are liable for?

Why are we so accepting of tax avoidance?

The £3k is per person per year and can be backdated as a PP said. But also as we are near the end of the tax year its worth doing it very soon, (ie 2 x £3k each, covering 2020-2021 and 2021-2022 tax years, then there is another opportunity post 6th April for 2022-2023 tax year.

And regular gifts out of income that do not reduce the donor's standard of living are also exempt eg paying a regular bill or just a regular gift.

@LizDoingTheCanCan

I do realise we are very fortunate to potentially be in this position, and will definitely now try and find a tax adviser for mum locally.

Or you could choose to pay the tax you are liable for?

Why are we so accepting of tax avoidance?

My dad has paid his taxes all his working life, from age 16 to when he retired at 64. Why should there be more tax on top of that just because he’s been money wise and saved for the future? He’s also not state dependent for his care home fees because of this.

My DSis and I also paid all our own taxes since leaving school / uni, so around 30 years for each of us, bar small breaks to have our children.

It’s a very unfair tax in my opinion.

Thank you everyone for your input and guidance, I do very much appreciate it.

@LizDoingTheCanCan

I do realise we are very fortunate to potentially be in this position, and will definitely now try and find a tax adviser for mum locally.

Or you could choose to pay the tax you are liable for?

Why are we so accepting of tax avoidance?

The allowances are there to be utilised. There is a big difference between Tax evasion and tax avoidance. One is legal and good tax planning. The other is illegal.