Inheritance tax - gift

[Confusedretax]

If a parent gifts £10k to a child but dies before 7 years how much inheritance tax is due if they carry over the £3k allowance from the year before ? I've done the online calculator and it says no tax is due.

Surely since the estate (including the gift) is less than £650k there is no tax to pay? You are nowhere near the threshold. I would call HMRC if you are worried - they are very helpful.

You would think so wouldn't you? Nothing is very clear though and I don't want to get it wrong.

The estate does pay IHT. Think of it like this - a gift remains within the persons estate for 7 years after they have given it. So although the money has been passed to someone else, it remains part of the estate so can incur IHT. If IHT is due, it's not the beneficiary of the gift paying the IHT, it's the estate (because the gift remains part of the estate for 7 years).

It's not the person who was gifted that pays the tax. The estate does so if the person who has died had previously been left money by their spouse then their exemption will be £650000 or up to £1m if a house then the £10k will use up that amount of the exemption. So instead of £650000 tax free there will only be £640000 tax free.
If the person pays it back then £650000 is tax free but there is £10k more to tax.
The gift of £10k would have an exemption of £3k for one tax year and another £3k for a previous year. So only £4k would be added back to the estate to included in the calculation. The estate pays the tax. Not the recipient (although there may be occasions when they do if big gifts and bigger estates with large bills.)

You haven't got it wrong but call HMRC if you need to. I called them when my Dad died to ask about something relating to IHT and they were very helpful.

No, this is right. If a person's IHT nil rate band is £325k, then any amount over that is liable for IHT. So imagine they'd given you exactly £325k and then died within 7 years. That would be fine (for you) because it falls within the NRB allowance. The executors would have to pay IHT on everything else left and this would come out of the estate.

However, if they'd given you £425k and then died, you would have to pay tax on the extra £100k. The gift still counts as part of the estate until 7 years have passed, and you benefit from the NRB of £325k, but you would be liable for tax on the rest.

In OP's case, the gift is only £10k, and the estate is not large, so it's very likely that no tax is due at all, and even if it were, it wouldn't be the recipient of the gift who had to pay. OP I would tend to trust the government's online calculator as it's quite good, especially if the estate is not complicated and you are sure you've put all the numbers in correctly. You do have to claim the other spouse's NRB (i.e. it's not 'automatic' as you do have to put on the form that you're doing it) but hopefully this should be straightforward.

You’ve still got to fill in an IHT400 and declare the gifts, even though there’s no tax to pay, because you need to claim the residence nil rate band. HMRC’s guidance online is unclear (unless you read the IHT Manual, which most people won’t). I did flag this to them some time ago, but they haven’t done anything about it. You’re absolutely right to get advice (because some of what you are being told here is incorrect or just general misunderstanding)

Surely it’s only the estate that would owe the tax rather than the individual? I wouldn’t worry about it as the recipient of the gift.

Assuming they didn't buy any presents. There can also be tax free gifts out of income if it doesn't affect living standards, but more difficult to justify.

Up to three years before death there is no no taper relief, so full tax due.

I've just spoken to a solicitor and they've quoted nearly £10k to deal with everything including the sale of the house (which we don't want them to do) . They did confirm that there will be no tax to pay.

Try elsewhere- most firms will do a Grant-only service for significantly less than that, if you deal with the rest of the estate.
Solicitors are required by their regulator to advertise their probate fees on their websites. Some are more clear than others but you should be able to tell who whether they do a Grant-only fixed fee without having to ring.

Sorry, that was a typo. £650k if the first to die leaves their estate to their spouse. There is no inheritance tax to pay on the first death, if their spouse is the inheritor.

And yes, if there's a house involved that the recently deceased lived in (or only had to leave to go to a care home) the IH threshold would be £1m.

Just saw your update. I'd just get a solicitor to do the grant of probate, if the deceased's will is straightforward and leaves everything to their children.

If there is a married couple and both of them have died then, assuming the Will of the first person to die left their whole estate to the surviving spouse or a life interest in the whole estate in favour their spouse then, on the second death the combined Nil Rate Band allowance is £650,000.

If the estate is worth £570,000 and a gift of £10k was made two years ago then this is a failed PET (potentially exempt transfer). The £10k is added back in to the value of the estate.

So value of estate before gift - £570,000
Value of estate after gift - £560,000
Value of estate on death (gift added back in) £570,000

No IHT to pay if two Nil Rate Bands are available. No need to do an Inheritance Tax account IHT400 unless you wanted to claim the Residence Nil Rate Band and the unused Residence Nil Rate Band from the first death but I can see no reason why you would need to claim the RNRB in these circumstances.

I'm so confused! @SleepDeprivedCatSlave Parents were married and the whole estate was left to the surviving parent, so no tax allowance was used. I thought that in order to use the previous allowance then you had to complete the IHT 402 and IHT 400

@Confusedretax No you don’t. This is an excepted estate. When you apply for the Grant online they will ask if you’re submitting an IHT400. You say no. Then it will ask for the gross estate for IHT and net estate for IHT and the net qualifying value.

Then you will be asked if the deceased had a spouse who has predeceased. You say yes. Then you are asked if you are claiming the unused Nil Rate Band from the first death. You say yes.

You are then asked for the gross estate for probate and the net estate for probate.

It will really help you to fill in the IHT205. Now, you are not using this form in your application, or sending it anywhere. But this form will help you.

Firstly read all questions from Box 2 to Box 8. Answering yes to certain questions will mean having to complete the IHT400 but, based on what you’ve said I don’t think you’ll need to do this.

Now go to box 9.1. Put the gift amount in here.

Then go to Box 11.1. This is the first box where you start listing the value of the assets. Fill in each box from 11.1 to 11.11.

Then fill in the funeral amount and any other liabilities you can include.

Boxes D and F are the gross and net figures for probate.

Boxes H and G are the gross and net figures for Inheritance Tax. If Box H is less than £650k then you are fine.

The net qualifying value is at Box K.

You will see on the last page that there are three tick boxes. If you had to fill in this form (which you don’t if the deceased died on or after the 1st January 2022) then you would also have to fill in an IHT217 to claim the unused Nil Rate Band. See the second box down on the last page. You can now claim the unused Nil Rate Band in your online application instead of filling in the IHT217.

Like I said you don’t use the IHT205 but filling it in as an exercise will help you.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1040948/IHT2052011.pdf

Thank you so much for explaining it so clearly! I'll definitely complete the form . It's all so stressful especially when I keep having waves of grief and can't see for tears xx

I wish people would stop misunderstanding Taper relief - it is only relevant if £325k has already been gifted, the Taper relief starts after that point.

Depends on the gifts before that date. The taper relief isn’t relevant if the nil rate band hasn’t been used. So the £10k comes from the tax free amount.

@Confusedretax Don’t forget to deduct £3,000 from the gift amount (using annual allowance from the relevant tax year). You can also deduct a further £3,000 from the previous tax year if no gifts were made in the previous year. So say the gift was in the 2023/2024 tax year. Deduct £3,000 from the gift. Assuming there were no gifts in the 2022/2023 tax year you can deduct a further £3,000.

Yes , thank you, we have 2 years of the gift allowance to use so only have to declare £4k.
I still don't get the 7year thing though, especially as when I used the calculator it said no tax to pay, I assumed I would have to pay tax on the £4k .

You only pay inheritance tax if the value of the estate exceeds the allowances.

If your estate is below the thresholds then the gifts are irrelevant. You should still include the gifts in your figures but it makes no difference to the
IHT position.

Say the estate was valued at £650,000, so equivalent to two nil rate bands. Assuming the residence nil rate band couldn’t be claimed for whatever reason to keep it simple.

If the gift was £10k then adding this back in, deducting any allowances, would leave £4k to be added back into the estate.

The estate for calculating IHT would then be £654k, exceeding the two nil rate bands, and the estate would pay tax on the £4k.

Your estate is already well below £650k so the gifts are irrelevant.

If there is a house in the estate be careful. Whatever you declare the value of the house is will be the date of death value. If, on disposal, you sell for more than the probate value then the disposal might trigger a CGT liability on the gain. This will obviously depend on the circumstances and whether the property is your main residence. Because the allowances for CGT are so low now this is becoming more of an issue for executors because an estate only has one allowance for CGT. If you have concerns about this then take professional advice before disposal and be realistic about the value of the property for probate.

Again thank you so much for the advice @SleepDeprivedCatSlave , does the NRNB get applied automatically?

It goes on a sliding scale. I think if you die (sorry) inside 3 years, then the whole gift is liable for IHT, if applicable, and for lots of folks, that could be 40per cent. After 3 year the liability decreased to zilch by year 7 😏

You can just ask Claude, or your fav AI, to get the exact numbers.

I wonder if this misunderstanding is one reason why HMRC are raking it in with IHT because the taper relief only applies if the gift is more than £325k (happy to be corrected if I’m wrong) and I would guess that most gifts are below that amount.