Inheritance tax, gifts and 7 year rule

[madamy]

My PIL recently downsized and released a large sum of money. They plan to gift around 100k to each of their 6 children. Their estate will still be worth at least 600k after this. They are in their mid 80s and reasonably well but obviously there's a good chance that one or both will die within 7 years.

If they do, will the 6 children have to pay the inheritance tax on their 100k gifts directly, or will this be included in the overall estate and taken from that before the 'balance' is inherited?

We know about the decreasing rule during those 7 years, and at present would put aside 40% of the gift to account for the tax, but obviously if we don't need to do that, it would be great!

Following

In short no.

It’a definitely worth taking specialist advice to minimize (eliminate) any IHT on the remaining estate.

Their wills should be structured appropriately

It's actually pretty simple. After any gift is made if your PILs die within 7 years of making that gift to you there will be tax to pay, and the amount decreases over time. I think (but am not 100% sure, maybe another poster can clarify) if the gift is made jointly by both PIL, it is treated as 50% coming from one, and 50% from the other. Therefore tax on 50% of the total sum gifted falls due when one of your PILs die. If both should die within the 7 years, then tax will be payable on both halves, but potentially at different rates depending upon when each of them dies.

The rule is 40% tax is payable if death occurs within the first 3 years after the gift is made.
Then it is a sliding scale :
Death during year 3-4 = 32%
Year 4-5 = 24%
Year 5-6 = 16%
Year 6-7 = 8%
After 7 years then no tax is payable.

I had this issue when I was gifted some money from an aging relative. What I did was set aside 40% from the outset, in case of her dying within the first 3 years, and then withdrew some of that money starting from year 4, as the potential tax I might have to pay reduced. That way I knew I wouldn't be caught out by a large tax bill if the worst was to happen.

Hope this helps.

Oh, and I just realised I didn't read your OP properly, so sorry about that. Just ignore me, I am an idiot.

The estate is liable for IHT not the recipients of a gift.

No, the liability is on the estate not the recipients of the gifts. There are annual allowances for gifts which taper off the value over time and certain purposes are excluded.

What happens if there isn’t enough left in the estate to pay the IHT?

IHT would only be due if the estate is large enough so there will always be enough money to pay the tax.

But the gifts are "added back" for the purpose of the value of the estate for IHT purposes.

Don’t forget this could be seen as deliberate Deprivation of Assets for Care Home or Carers at home, if needed and Social Services will try to reclaim it if either parent needs care

I'd think about dissuading your in-laws from doing this. It's incredibly kind of them but they should keep the money for themselves in case they need it. What if one or both of them end up needing long term care either in the home or in a care facility. My parents in law are both in their 90s and we are helping pay for care as their estate has been eaten up in care costs and the difference between private and state care is too much. I know it varies from area to area but I don't think it's worth the risk.

If they are married with a house and leave their estate to children and have properly drafted wills there’s no iht on the first death at all and they have £500k allowance each so only the estate above £1m will be taxed at 40% once on the second death anyway so shouldnt be any IHT to pay so wouldn’t worry. Yes if they make large gifts then need care the gifts might count as deprivation of assets and have to be repaid. No time limit on LA powers to do that.

For most people worry about care fees has replaced worry about IHT

Yes there is also the question of funding care home fees. There is not a specified limit to the number of years they can go back when investigating gifts of large sums of money.

Oh God. So much here that is not true.

If they have not used their nil rate bands to date there will be no IHT to pay on the gifts whether they die within seven years or not. It’s set against the gifts first and there will be no taper.

If there was tax due primary responsibility for paying it does indeed fall on the recipient. The executors are also liable and can be chased for payment if unpaid after 12 months.

Have you looked at this? www.gov.uk/inheritance-tax#:~:text=The%20standard%20Inheritance%20Tax%20rate,%C2%A3500%2C000%20minus%20%C2%A3325%2C000).

If there is still £600k in the estate after the gift then I don't think deprivation of assets is an issue for care home charges. Especially if they've already reached 80+ without needing a care home.

In practice, care home fees can be paid firstly out of income (pension etc) and only then out of capital. In my mother's case the monthly pensions met about 50% of the costs.

Married couple with a house going to kids on second death all to spouse on first death there won’t be any iht on a £600k estate anyway - so all the fuss about gifting for tax reasons is irrelevant.

Nope. Not true if both of them die within 7 years.

Only if they have already used their nil rate band

Not true. See previous post.

1. not true
2. not true

True in this scenario

There would be IHT due if they both died within seven years.

Not if they managed to spend £200k of their remaining capital before they died.
But to spend £200k to save possibly £80k in IHT is a little self defeating.