The seven year rule on gifting money - how do ‘they’ know?

[Pbok]

My DF thinks that when someone dies, HMRC has full access to last seven years of their bank accounts and go through them with a fine toothed comb, looking for any and all money transfers.

For this reason, if he owes me any money even day just £20, he prefers to give it me in cash.

Is he right? How do ‘they’ know?

If the estate will require probate (if it includes property, stocks & shares or savings above the level that the particular financial institution has set for needing probate to release) then the executor will have to complete a probate fomr which asks them to confirm what non-exempt gifts have been made in the last seven years .(Non-exempt gifts are those above the annual IHT gift allowance that are not to charities). So it's the executor rather than HMRC that wil lhave to plough therough bank accounts for the last seven years if the deceased hasn;t kept good records. (I know, I'm currently having to do it for my late father).

But if your DF 'owes you money' then it's not a gift anyhow, it;s paying you back for something, so not really relevant....

There's also a £3,000 per year exemption on gifts to children as well as 7 year rule so fine under that amount and oweing you money and paying it back is different.

'They' will be able to accessed his bank account after his death to see all transactions going back 7 years and they will spot it even when it hasn't been declared in Probate. I presume it will be one of their standard searches on all probate applications

They do go through bank statements and asked about any larger transactions when we did my mum's probate

They do ask on the form but they have no definition of major gift anyway! I guess the cash is to avoid having lots of transactions in the statement

simeone one another thread said you can give DC £6000 a year rather than £3000 but I can't find that information

anyway I see his point but I don't think anything like £20 will cause issues. Just more practical to do in cash.

It's the executor who has to go through bank accounts and make declarations about gifts. I presume HMRC could demand copies if they had suspicions about tax evasion, but I think it is highly unlikely.

I had to do probate for both my parents recently. They had both made regular gifts to all their grandchildren, going well over the £3k per year IHT-exempt limit, but counting as gifts from income, which are also IHT exempt if you can prove that you have surplus income to give away rather than capital.

In order to prove that, I basically had to create a spreadsheet of all my parents' income and outgoings for a seven year period. It was essentially a work of fiction, as there was no way I could work out exactly what they had spent lots of cash on (even though it was clear they had surplus income due to the large balances building up in their bank accounts), but it was accepted without query by HMRC anyway.

If they had actually checked bank accounts, they would have found many transfers of £1k or £2k to my account from my mother's, which I did not declare, as this was for shopping and cash withdrawals I did for her after she became housebound and before she agreed it would be much easier if I just had a second card on her account, and then later I had POA over her accounts.

Your DF is being paranoid for no reason. If he transferred you £200k HMRC might be interested, but not £20.

The £3k limit a year is per donor, not per recipient, so if someone has two children they can give them £1,500 a year each, if it is three children then £1,000 a year each and so on, unless it comes out of surplus income as I describe in my last post, in which case I am not sure there is a fixed limit at all.

I’m an executor and I’ve just got probate. I don’t remember this question. Gosh, have I missed something. No gifts were made anyway.

@SoloSofa24 "In order to prove that, I basically had to create a spreadsheet of all my parents' income and outgoings for a seven year period"

you mean HMRC asked for that? Wouldn't it be easier for them to look at the accounts? I wouldn't know what dad did or didn't spend on. Or I'd look at his account. Which I thought HMRC would do?

Is the "they" you are talking about here HMRC, or the executors or solicitors who were doing the probate application? I really don't think HMRC routinely go through piles of bank statements, or at least not in my experience of dealing with two fairly substantial probate applications.

How are you meant to actually remember? For example I know my mum paid towards one of our holidays in the last few yrs but I can’t actually remember how much & she gave some money towards a room renovation but again I couldn’t tell you how much.

What a good question!
IME on wills and inheritance generally, I am shocked at how little control and checks there are around it. For e.g. an executor could distribute an estate exactly as they pleased regardless of the will and, unless someone complains, noone will ever know. I mean it is illegal but there are no checks. And to complain is tricky and usually costs money.

My guess is the gift limit relies on honesty, and only the occasional spot check is done but would love to hear first hand experiences.

Yes, I had to do all that in order to fill in this IHT form, specifically sections 20 and 21. HMRC did not ask for any paperwork at all to back it up, certainly not the many, many thousands of pieces of paper I had to go through in order to compile the tables. Being an executor involves a huge amount of very tedious work like that.

assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Parents can also give £5k to a child on marriage. This may be what you are remembering.

On top of the £3k/year, you can give additional small gifts e.g. for birthdays, as long as it comes from income and doesn't impact standard of living.

You only have to do the form I linked to above if there were gifts above the £3k limit, so you probably just skipped it.

Yes, I think it relies hugely on honesty. I filled all the forms out to the best of my knowledge, using the available information and being honest, but I am pretty sure I could have got away with massaging various figures, not declaring the gold coins I found in my parents' safe and so on.

https://www.gov.uk/inheritance-tax/gifts

I think the £3k is £3k per parent per year between however many children. Two parents would be £6k between however many children so 3 kids £2k each.

@Chewbecca "My guess is the gift limit relies on honesty". Happy to be honest. But how when there's no definition of major gift? nothing about HMRC ever makes sense

@SoloSofa24 thsnks, never seen that. I know accountant has the income figures and I can make rough figures for expenses- which are low. I'm probably a bit in denial about the future but it's good to see the form

friends who had this experience said having an accountant was more important than a solicitor.

The OP’s DF (father? Friend?) is claiming that HMRC trawl through 7 years’ worth of bank statements for every deceased person though, and that’s surely false.

What he’s talking about isn’t cash gifts in any case. Paying back money that was lent to you isn’t giving a gift.

HMRC can barely answer the phone
let alone go through hundred of bank statments
They rely on trust and honestly
just like they do for SA

Although they add probably the nicer departments to speak to - once you get through to speak to them

HMRC work on "honesty" for virtually everything, whether IHT returns, self assessment, VAT returns, etc. The days are long gone where you had local tax inspectors sitting in offices looking through piles of bank statements/invoices. The chances of anyone ever getting any kind of challenge, enquiry or inspection by HMRC are pretty much zilch these days. Of course, there's always a risk of a random inspection (often done by newly appointed inspectors to gain experience), and sometimes there is "intelligence" that triggers an inspection such as something thrown up automatically by the HMRC computer when cross referencing one database against another (such as benefit records, land registry property transfers etc). Sometimes they have a kind of "task force" looking for a specific type of thing with a small team of inspectors specifically interrogate various databases looking for specific transactions etc.

It's akin to traffic offences really. Your chances of being caught driving without a seatbelt or looking at your mobile phone or driving without a valid MOT or going through a traffic light just changed to red, are pretty much zilch. Police driving around aren't generally looking for that kind of thing and probably in a World of their own and wouldn't notice anyway. Yet, sometimes, there'll be a task force set up for those exact offences and there'll be a small team of officers parked up specifically to catch people doing one of those things, so occasionally your "chances" of being caught are higher if you're in the wrong place at the wrong time.

Back to IHT, HMRC already have databases of "big" transactions, i.e. house conveyances, large bank transfers, so it would be pretty easy for them to interrogate those databases for any probate applications that are large or otherwise look a bit strange. They'll also have self assessment tax returns going back years for people who've had to complete and submit them, i.e. higher earners, those with lots of income from interest and dividends (indicating large savings). They also have a database of ISA accounts (banks have to report via National Insurance numbers). Also databases of people's pension contributions (as HMRC administer the tax repayments to pension schemes).

So they have a lot of information that they "could" cross reference. Whether they do or not is a different story. Personally, I see very little signs of action from them which has been the case for 20-30 years hence my initial comments about there being very little risk of being challenged, especially for relatively small/simple estates and even moreso for people who've kept their head below the parapit and not drawn attention to themselves!

What are you supposed to do when you see that DM sent £5k several times a year to an account. How do you find out who that account belongs to? Do they have to speak to you and tell you what the payment was for?

Thinking of a friend's DM who was involved in romance scams for a few years before her death. She sent about £50k to various men. Would the taxi on that have to come from her estate? [Would love to ask my friend but that would be rather insensitive]

Whilst the message is right, no they're not going through hundreds of bank statements, but they get that detail in electronic format so can quickly do electronic sorting, exception reporting, transaction searching etc. They can create very long and very detailed exception reports very quickly. You've got to hope that they work down the list in order of largest transactions first (which would be logical), so they'll never get far enough down to transactions involving the average Joe Public, as you'd hope they concentrate on the huge numbers first, i.e. millions and tens of millions before they clear all those and start looking at hundreds of thousands and then tens of thousands. In fact when interrogating the bank transaction databases, they may set the parameters at nothing under a million or nothing under ten million, just to keep the transaction numbers small enough to work with.

We saw a lot of activity a few years ago when they started interrogating the land registry database to pick out undeclared property sales (where it appeared CGT would be due but no record was on any self assessment tax returns). From the cases we saw, they were picking out property sales close to a million and more. We saw no challenges at all on property sales under half a million at that time. Which kind of suggests they were just picking out the largest transactions to check first. Over the years since, we have seen some smaller property sale values being challenged, which kind of suggests they started working down the list to smaller values once they'd checked the bigger ones!

They don't routinely go through bank statements, no. The first line is basically if anything flags as weird, so someone on property records as owning several properties for example in expensive areas but a strangely low figure for assets, that sort of thing. If it gets to investigation stage then that's when bank statements etc come into play, but mostly they are relying on self-declaration crossed with the information they hold about the deceased.

I asked my solicitor how much I was expected to do as executor, and she said I wasn't expected to comb through seven years of bank statements and work out where each payment went and what it was for as that was beyond a reasonable expectation. I therefore filled forms in to the best of my knowledge as my mum didn't leave behind records of gifts (I don't think this was an omission on her behalf!).

It’s £3k each parent per year but you can go back one year so in the first year it’s effectively £6k then £3k per year going forward each parent