Random inheritance/gift tax question

[MulberryPeony]

I’ll try to lay out the facts. I’m related to one and we were pondering.

Three sisters, elderly parents. Two sisters borrowed 50k for house renovations. The third didn’t need it. One paid back in full many years ago but the final sister has only paid some back so far. Parents would like to let the final sister off with the remainder (20k) and gift 20k to each of the other sisters.

The other sisters are now worried if one parent dies within 7 years their portion of this early inheritance would be gift taxed. If the second parent dies then IT would be due. I presume the gifts would be taxed only once. There’s already a bit of a mismatch because one sister hasn’t had use of this money at all. Would the final sister pay any tax because it was a loan? Parents would want to make all sisters equal and given they may well live past 7 years anyway (they’re fit and healthy for their age) it seems OTT to go to the effort of dealing with it in wills.

Oh and I’ve just thought about care and the possibility of depravation of assets?

I am not a laywer or a tax accountant, but I'd get them to look at this realistically. Each parent can pass on £350k tax-free. Anything that goes from one parent to the other is tax-free. The tax-free allowance of the first parent to go passes to the second one, if they are married or civil partners, so that means the second parent can leave £700k tax-free. And finally, when a parent leaves a house to their children and/or grandchildren that adds on another £150k tax-free, which can also be passed on to the surviving spouse/civil partner, so that's £1m passing on with no IHT due.

[Please correct if this is wrong, people who really do know about this stuff!]

Now, not many people in the UK are going to leave more than £1m. Are the parents here in that category?

Have they made any other gifts in the last 7 years? If not, then these 2 x £20k gifts will use up only a small proportion of each parent's £325k IHT nil rate band.

It would be a good idea to properly document what goes on, i.e. have it in writing that the sister that owes £20k is not required to repay it to the Estate on second death, and that the 2 x £20k are being made as gifts, not loans. In addition, each person can make a single gift of up to £3k per annum which would be exempt from possible IHT and can also go back a year if no gifts made last year, so potentially total of only £28k of the the total £40k gifted would use up some of the Nil Rate Band.

Also bear in mind that each parent has a £3k per year gift allowance. I think you might be able to carry back a year as well so that would allow them to give £3k each now, possibly another £3k in respect of last year and then another £3k in April. That would shelter £12-18k now. And then at £6k per year going forward.

They are married but they’re not £1m wealthy so far as I know. So no IT due regardless of the seven year thing? That’s a relief. I think we had both miss understood the seven year thing as being entirely separate from IT.

I’m no expert on this but you’re talking about 20k each for 2 sisters. If the parents die in 7 years would the tax be payable I’m picking 20% (like I said no expert here) which is £4000. It sounds like there are other assets that will also be passed down so in this situation are you really quibbling about £4000 baring in mind your parents have just died.

I get the notion of broadly wanting to be fair but is this really something for your family to dwell on? Did sister pay interest on the 50k? When was her 20k leant…. What’s its absolute value today vs in 7 years. Where do you draw the line on being fair.

I’m not trying to be rude about it but just trying to give a perspective.

Calm down. I’m related not one of the sisters and no one has even died FGS. Both loans were broadly at the same time and a decade ago. Eldest sister didn’t need the loan prior to that time. You are right it is small scale in relation to the total estate value but no one wants to feel hard done by naturally.

Sorry @KarmenPQZ you were just mixing tenses up and tying to be helpful.

It's 40% I think

If there is IHT to pay it is not paid by the beneficiaries directly but by the estate of the deceased.

So if the donor dies within 7 years and if the estate is higher than the IHT allowances available then the 40% tax of the remainder will be taken from the other assets before they are distributed.

I think what is being proposed is fair and there is no disadvantage to the 2 sisters being given £20k in comparison to the sister whose loan will be written off as a gift.

Also if the parents are currently fit and healthy and not at the point where they can foresee care will be needed this is unlikely to be considered a deprivation of assets.

Yes
£1m total across both parents as noted above
Yes if both is relatively good health then DoA won't apply. If in doubt perhaps the healthiest could be the one to formally give it
Yes keep records

The government website:-https://www.gov.uk/inheritance-tax states

”People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.”

Therefore, since the total sum to be gifted is less than this, any inheritance tax due will be paid by the estate and not the individuals. So I also think the proposal is fair.

Records do need to be kept, as this will make completing the forms for probate easier.

Yes this is the best way to do it. I do gifting to my DC and I can gift £3 per year which I split between 3 DC so £1k each then I can gift unlimited gifts of £250 but not to the same people I gifted the £3k too.

Sorry, so legally we can gift any amount but the problem is that if we die within 7 yrs IT would be paid from the estate?

The inheritance tax allowances and rates have been given by PP, and probably nothing to worry about, so I’d just add that in the scenario OP describes it’s three gifts of £20k. Two gifts in cash, and one gift of debt forgiveness.

Also note there is a bit more to IHT- it's a higher threshold if leaving family home to dc's or gdc's

If you died within seven years of making the gift, the money you gave away would be added back to your estate. So if you died with, say, 200k but you'd given 200k away the year before, your estate would be treated as 400k, which might mean IHT would be payable. However, if I understand correctly, it's only payable on the amount over your allowance of £325k and you might have more of an allowance than that, as already mentioned. (I said £350k above, but I think it's actually £325k and an extra £175k for the house.)

If any taxes are due that they’ll come out of the estate anyway I think probably settles the fairness issue for them. Thanks all.

Make sure the gifts are given from a sole account rather than the parents joint account

Why @grassyknees? And would it be better each payment coming from each parent rather than one to make used of that gifting allowance and any unused allowance if available?

The main issue is really the £1m total estate value, unless this us changed by the government.
If its well under that you're fine
If its anywhere close then this is where the record keeping comes in as you are proving you didn't gift any value that would have taken it over the £1m

It's really for clarity. When calculating IHT and looking back to see gifts given in the last 7 years, if the gift comes from a joint account (and only one of the account holders has died), they will need to do an additional investigation to determine who the gift was from and it may involve assessing who contributed to the joint account over time.

Unless they are worth over £1million then there would be no IHT and gifts are irrelevant.

What is relevant, however, is potential Deprivation of assets if one/both of them need care and don’t have the funds to pay. There is no time limit for Councils and they are like blood hounds.
As long as they are both in decent health with no current prospect of needing care in future then proving intentional DoA is impossible.
50’s, healthy and gifting money = fine.
80’s, poor health and gifting money = potential problem.