Inheritance or gift tax question
Discussion
One for the legal bods- If I wish to pass on say £10k to my daugher, it would exceed the gift tax threshold and tax would be owed on it- but can I pass this on as part of a will before my death, and assuming I live more than another 7 years before I die, this would avoid any tax being payable if my estate is worth more than the current death tax threshold? Basically what is the difference passing something on as a gift or part of a will?
Thanks
Mark
Thanks
Mark
Gift it to your daughter = up to £3K, zero issue. >£3K then the gift remains a potentially exempt transfer for the next 7 years (it tapers from all of it being hit with inheritance tax for the first 4 years (IIRC) down to a few % at year 7). Essentially the tax liability on your estate that you leave to your loved ones will include the gift that you give your daughter above the £3K threshold. Your daughter won't pay the tax due, your estate will prior to the remainder being handed over to the recipients.
Happy Jim said:
Gift it to your daughter = up to £3K, zero issue. >£3K then the gift remains a potentially exempt transfer for the next 7 years (it tapers from all of it being hit with inheritance tax for the first 4 years (IIRC) down to a few % at year 7). Essentially the tax liability on your estate that you leave to your loved ones will include the gift that you give your daughter above the £3K threshold. Your daughter won't pay the tax due, your estate will prior to the remainder being handed over to the recipients.
Just to add: It maybe the case that any unused £3,000 gift from the immediately preceding year can be used against the £10,000 gift, thus making £6,000 of the gift exempt. Leaving a Potentially Exempt Transfer [PET] of just £4,000. Please check this with HMRC as the rules keep changing.Also, there is a common misconception regarding the application of taper relief. It's important to remember that it's not the Potentially Exempt Transfer [PET] itself that is subject to the taper relief. The taper relief applies to the inheritance tax that arises on the PET. What's the difference you may ask? Well, in most cases the inheritance tax actually levied on a low value PET [less than £325,000] is usually £nil; hence no taper relief. There will be no inheritance tax, and therefore no taper relief, on the PET as envisaged by the OP, because on death the personal Nil Rate Band [NRB], currently £325,000, is always set first against any relevant PETs for their full, not tapered, value.
So, in the example above, whether the PET is £4000, or £7,000 it will form the first part of the estate to be set against the NRB on death, currently £325,000, thereby reducing the balance of NRB available to be set against the rest of the estate accordingly. So, in our example the amount of NRB available to be set set against the estate, excluding PETs, on death will be reduced to either £321,000 or £318,000, depending on the value of the PET. And, as there is no inheritance tax arising on the PET, as it is fully covered by the personal NRB, there will be no taper relief.
blitzracing said:
So is it just a case of putting a statement in my will to say here's £10k for my daugher- then pass her the money today and live for an another 7 years for it to be tax exempt? Seems a bit too easy?
You may be confusing the issue unnecessarily.There is no inherent connection between the PET and the will. I'm not sure that there is any need to mention the £10,000 previously gifted payment in your will. Indeed, by the time of your death the money will have left your estate (gifted to your daughter sometime in the past) and will not be in your gift, so to speak, to be handed down in your will.
But to answer the main question that you ask, yes, regardless of how much you give away, if you survive seven years after the giving of the gift then the gift completely falls out of your estate for inheritance tax purposes.
One caveat that is sometimes overlooked. If you give away the whole of your estate and capital to your children, (which you maybe able to do if you have sufficient annual pension for your requirements), but you don't survive the full seven years, then the PETs will fall back into the estate and be assessed for inheritance tax which your remaining estate may not be able to pay. In these circumstances HMRC will look to the recipients of the PETs to make good the deficit in the settlement of inheritance tax on your estate. But, your children may have invested the PETs in property etc, which could cause them financial problems in raising the funds to settle the IHT.
Dan_M5 said:
blitzracing said:
So is it just a case of putting a statement in my will to say here's £10k for my daugher- then pass her the money today and live for an another 7 years for it to be tax exempt? Seems a bit too easy?
Isn't that how you get round tax on house's over the threshold too
OK- so if we take a value of £10k, deduct the 6 k or so we can use for the two years gift tax allowance, the remaining 4k becomes taxable, so what happens now? You have to 'fess up and tell him and pay your dues? If however Id left the £10k as part of a will, and survive the 7 years, is that now gift tax exempt?
blitzracing said:
OK- so if we take a value of £10k, deduct the 6 k or so we can use for the two years gift tax allowance, the remaining 4k becomes taxable, so what happens now? You have to 'fess up and tell him and pay your dues? If however Id left the £10k as part of a will, and survive the 7 years, is that now gift tax exempt?
Or wait until April 2018 to give another £4k?blitzracing said:
OK- so if we take a value of £10k, deduct the 6 k or so we can use for the two years gift tax allowance, the remaining 4k becomes taxable, so what happens now? You have to 'fess up and tell him and pay your dues? If however Id left the £10k as part of a will, and survive the 7 years, is that now gift tax exempt?
You can only give away £10k via a will if you are dead.If you are giving away £10k before you die it is a gift and a PET. Annual gift allowance applies. Survive 7 years and no IHT for your estate (or daughter) to pay on it.
As someone above says you seem to be confusing two different things and making life more complicated than it needs to be?
AndrewEH1 said:
Whatever you do either get professional advice and at least record exactly want you do transfer and keep it in a file along with your will etc so whoever is dealing with your estate they'll know all the facts.
+1I suggest that you take a photocopy/scan of the cheque so that the amount, date and your signature are clearly visible. For a belt-and-braces approach obtain a copy of your daughter's bank statement showing the date she banked the cheque. For IHT purposes the date of banking is irrelevant it's the date of the gift that matters. However, a copy of the bank statement will prove beyond all probability that the copy cheque had not been back-dated sometime after the event.
blitzracing said:
OK- so if we take a value of £10k, deduct the 6 k or so we can use for the two years gift tax allowance, the remaining 4k becomes taxable, so what happens now? You have to 'fess up and tell him and pay your dues? If however Id left the £10k as part of a will, and survive the 7 years, is that now gift tax exempt?
The £4,000 only becomes taxable on your death, (ie. it becomes subject to Inheritance Tax at that date). During the ensuing seven years following the giving of the gift it is a Potentially Exempt Transfer [the clue is in the word Potentially]. Survive seven years and it's no longer a Potentially Exempt Transfer it's an Actually Exempt Transfer and it's not taxable in any way - die before the seven years are up, then, and only then, does it becomes taxable as part of your estate and your executors will pay the inheritance tax on it, if any.Following the giving of the gift, you don't have to do or pay anything, until you die that is. By that time you are incapable of doing anything, so it's your executors (possibly your daughter?) who will be charged with making a return to HMRC of your estate. This Inheritance Tax Return MUST include all in-date PETS gifted during the seven years prior to death. Failure to disclose the existence of an in-date PET by the executors will result in penalties and interest. The penalty is likely to be severe if one of the executors happens to be the recipient of an in-date PET which she has failed to disclose.
The gift is assumed to come from the person holding the account. Single name on the cheque account, single person's gift allowances.
The OP said 'we' if you, and your wife (?), have a joint account a gift to your daughter of £10k would not be a PET as it would be covered under the annual £3k per person allowance, including the previous years unused allowances.
The other gift you've got of course is from income, not affecting your standard of living. That can be a little more complex.
The OP said 'we' if you, and your wife (?), have a joint account a gift to your daughter of £10k would not be a PET as it would be covered under the annual £3k per person allowance, including the previous years unused allowances.
The other gift you've got of course is from income, not affecting your standard of living. That can be a little more complex.
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