Can anyone give me a simple explanation re inheritance tax please?

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I almost don't want to jinx this by typing it but Dh's dad is potentially offering us a substantial amount of money, possibly £50k, possibly more, (he mentioned £200k at one point ) to put towards buying a house.

I know inheritance tax is 40% but I don't understand how it works.

If he gives us say £100k do we have to just automatically give £40k straight to the govt in tax? What is the rule about surviving 7 years? Do we need specialist advice? What do people normally do, surely they don't put 40% of anything aside just in case the giver dies before the 7 years is up?

I realise a little knowledge may be a dangerous thing as the above may be complete rot but anyone who can shed any light, please do.

I suspect we need specialist advice and if so, where should we go to get this?

Thanks in advance for any advice.
I do realise btw that if we are given a gift of this size it will make us EXTREMELY lucky. It may not happen but since dh's dad has said he will do this we need to think about it.

Hi WWW,

Am no legal expert and can only comment on what I've been through and experienced but I hope it helps. You only pay 40% IHT on amounts OVER the threshold (currently around £280k). This takes into account the entirety of the estate in question, including the house etc. Sadly, if anything does happen to you FIL in the 7 years after gifting you the money then it would count as part of the estate and you would possibly owe 40% of it, depending on how much over the tax threshold the estate was.

any help ?

IIRC the money counts as a Partially Exempt Transer so as long as the giver survives 7 years from date of transfer it will not be eligible for inheritance tax.

Am not sure what would happen if the giver didn't survive 7 years - other than that you would need to pay the 40% (although this would depend on whether his estate came to more than the threshold but presumably if he's offering you this amount it probably does). It may be that it is considered as part of the estate as a whole and then 40% of that is given in IHT. So, if you are the sole beneficiary it would be sorted out that way - or could at least come out of your share (but you would need to check this bit).

IIRC the money counts as a Partially Exempt Transer so as long as the giver survives 7 years from date of transfer it will not be eligible for inheritance tax.

Am not sure what would happen if the giver didn't survive 7 years - other than that you would need to pay the 40% (although this would depend on whether his estate came to more than the threshold but presumably if he's offering you this amount it probably does). It may be that it is considered as part of the estate as a whole and then 40% of that is given in IHT. So, if you are the sole beneficiary it would be sorted out that way - or could at least come out of your share (but you would need to check this bit).

We rent atm so it means buying somewhere pretty lovely with only a v small mortgage which we could manage on one salary. I am so so so hopeful that it'll actually happen. We have rented for years and I really want a house.

It is only payable on his death , ie if within 7 years it is taken into account when the estate is valued and any IHT calculated, assuming the total is over the threshold, which is then paid from the estate before any remaining assets are redistributed. You are liable to declare any interest accrued in the meantime for your tax purposes. Might be worth getting something in writing with dates etc on and advice via a solictor since it could be a large amount.

Oh tyhank you for this. So he can give a sum of money to his son (dh) of under £280k and there's no inheritance tax as long as he lives 7 years? We are v hopeful that he will, he's v fit and active and is only 67.

the PET works on a sliding scale though. So if he survives 4 years you don't pay the full 40%

Presumably there is more to hispotential estate (or there would be no IHT) - do you know if for eg the £200k would be the total of your part (eg if his total estate would be £600k and there are 3 siblings). If so then you would have to make provision for the 40% (on a sliding scale) esp in the current housing market as I don't think the revenue would care if you couldn't sell your house they would still demand the money and fine you if you couldn't pay it!

WWW - not a tax expert so health warning on what I am about to say!

Inheritance tax is levied on the ESTATE of a person once they have died. So there is no liability to pay tax on a gift at the point you receive it, if the person making the gift is still alive.

If your FIL dies within 7 years of making the gift, then his estate will treat the gift as part of his overall estate when working out his liability for inheritance tax (but will apply taper relief, ie reduce the amount of the gift by an increasing amount depending on how long ago the gift was made). This inheritance liability will then be met from his ESTATE before the rest of it is distrubuted. So providing that he has other assets, then no-one will be pursuing you for the inheritance tax component of the money you recieve.

There are other things to think about, which reduce the amount that would form part of his estate, were he to die within 7 years. e.g. you can gift up to £3000??? a year and make more substantial wedding gifts, IIRC. You may want to see a specialist to discuss some of this - choose one of the mid-teir accountancy firms and ask to speak to one of thier IHT specialists. However, I think you could probably buy a book and deal with it yourself TBH!

sliding scale:

A gift from one person to another which is not liable to inheritance tax provided the person making the gift lives for at least seven years after the transfer is made. If he/she dies before seven years elapse, tax will be payable, the amount being related to the number of years following the transfer prior to death according to the table below.

Transfer up to 3 years before death: 100% of gift
Transfer 3 to 4 years before death: 80% of gift
Transfer 4 to 5 years before death: 60% of gift
Transfer 5 to 6 years before death: 40% of gift
Transfer 6 to 7 years before death: 20% of gift
The tax payable is normally charged to the recipient of the gift but in some circumstances it may revert to the donor's estate.

no the 280k relates to the total value of the estate not the gift. If he dies within 7 years that gift is counted towards the 280k so becoming liable for IHT which I think is payable on total (not total less 280, or whatever the threshold at the time is)

My father has recently bought my brother a house as a PET - we have told him we will keep him alive on a life support machine for 7 years if anything should happen

you don't pay CGT on your main residence

Thank you very much to everyone who posted with advice, saying thanks again as I asked for my post which mentioned specifics to be deleted at dh's request. He is very grateful for this advice as am I, let's just hope FIL does decide to give us this