Can someone explain “gifting money”
Discussion
My parents keep mentioning they want to send some cash to me and my brother. For me it would be used for an extension we’re planning on building and I don’t know about my brother probably another MG haha.
I’ve tried to read up on gifting money to children and I keep being directed to the 7 year rule for inheritance tax. Is there any other issues I need to look at or some articles people have found useful? I find it quite confusing to know what the law is with this kind of process.
I’ve tried to read up on gifting money to children and I keep being directed to the 7 year rule for inheritance tax. Is there any other issues I need to look at or some articles people have found useful? I find it quite confusing to know what the law is with this kind of process.
richatnort said:
The latter bunging me some money for the extension as a gift but they’re worried that I would be hit with inheritance tax if they were to die.
The bad news is that they are going to die. Sorry, but that's it.The slightly better news is that if they give you the money 7 years before they die there is no inheritance tax to pay.
Note.
This is the abridged version, there are other options and if they die within the 7 year period the tax payable is on a sliding scale.
Assuming the same pot of money is being used for gifts or for inheritance, gifting now gets more of it clear of IHT exposure, assuming other assets (house etc) have used up the IHT free allowance.
Of course the overall holistic view of tax optimisation is unknown but that’s the basic gist of it.
Saving 40% is definitely worth while on cash that’d otherwise be exposed.
Of course the overall holistic view of tax optimisation is unknown but that’s the basic gist of it.
Saving 40% is definitely worth while on cash that’d otherwise be exposed.
It's all at https://www.chattertons.com/site/blog/wills-blog/g... (random link I found by searching 'gift limit')
Essentially it's reducing the size of the estate to mitigate IHT liability.
They can give you £3,000pa each tax free, no strings attached. Maybe that's to reduce the estate, or maybe you need some cash and it helps.
They can give you more, but that becomes a PET (potentially exempt transfer) which is where the 7-year taper comes in.
There's also the IHT allowance which is explained in the link.
Essentially it's reducing the size of the estate to mitigate IHT liability.
They can give you £3,000pa each tax free, no strings attached. Maybe that's to reduce the estate, or maybe you need some cash and it helps.
They can give you more, but that becomes a PET (potentially exempt transfer) which is where the 7-year taper comes in.
There's also the IHT allowance which is explained in the link.
Ignore most of the above, a little knowledge is a dangerous thing...
The nil rate band (NRB) is £325,000 per parent, so £650,000 combined. As their children, if they pass their main home down to you then the residence nil rate band (RNRB) should also apply. That's another £175,000 per person. So long as their house is worth at least £350k then you can get the full benefit of the RNRB, because even if they downsize you can claim it against your previous more valuable property. Ergo, if their total net worth is under £1m then give away freely and don't worry about it.
NB: Should they be worth in excess of £2m then the RNRB tapers away by £1 for every £2 over, so by £2.7m it's all gone and you're just left with the £650k of standard NRBs. This is a good reason to gift as in that £2m to £2.7m bracket you're essentially paying 60% IHT...
You can give £3,000 per parent per year and you can also use last tax year's allowance if it wasn't used. That's £12,000 straight out of their estate immediately.
Assuming we're talking about a larger gift then the amount above the allowance will be a Potentially Exempt Transfer (PET). When they are gifting sums up to £325k per person then there is NO taper relief. They either live for 7yrs and it's outside their estate, or they don't and the gift fails. If it fails there's no IHT charge on the beneficiaries as it's covered by the NRB. However, the failed PET then reduces how much NRB is left to cover the rest of their estate.
If they give away more than £325k per person then only the amount above the NRB is eligible for taper relief during the 7yrs that follow after the gift is made. If the gift fails then £325k per person is covered by the NRB (but means the NRB is no longer available to apply to the rest of the estate) and the amount above is liable to an IHT charge that falls on the beneficiary, with taper relief applied if it's been at least 3yrs since the gift was made. This means you need to be careful about having the means to pay the IHT as the recipient of such a gift. There are gift inter vivos life assurance policies that offer reducing cover over the 7yrs to match how taper relief works. You'd then probably also want a 7yr level term assurance policy to cover the £325k part.
Simples.
The nil rate band (NRB) is £325,000 per parent, so £650,000 combined. As their children, if they pass their main home down to you then the residence nil rate band (RNRB) should also apply. That's another £175,000 per person. So long as their house is worth at least £350k then you can get the full benefit of the RNRB, because even if they downsize you can claim it against your previous more valuable property. Ergo, if their total net worth is under £1m then give away freely and don't worry about it.
NB: Should they be worth in excess of £2m then the RNRB tapers away by £1 for every £2 over, so by £2.7m it's all gone and you're just left with the £650k of standard NRBs. This is a good reason to gift as in that £2m to £2.7m bracket you're essentially paying 60% IHT...
You can give £3,000 per parent per year and you can also use last tax year's allowance if it wasn't used. That's £12,000 straight out of their estate immediately.
Assuming we're talking about a larger gift then the amount above the allowance will be a Potentially Exempt Transfer (PET). When they are gifting sums up to £325k per person then there is NO taper relief. They either live for 7yrs and it's outside their estate, or they don't and the gift fails. If it fails there's no IHT charge on the beneficiaries as it's covered by the NRB. However, the failed PET then reduces how much NRB is left to cover the rest of their estate.
If they give away more than £325k per person then only the amount above the NRB is eligible for taper relief during the 7yrs that follow after the gift is made. If the gift fails then £325k per person is covered by the NRB (but means the NRB is no longer available to apply to the rest of the estate) and the amount above is liable to an IHT charge that falls on the beneficiary, with taper relief applied if it's been at least 3yrs since the gift was made. This means you need to be careful about having the means to pay the IHT as the recipient of such a gift. There are gift inter vivos life assurance policies that offer reducing cover over the 7yrs to match how taper relief works. You'd then probably also want a 7yr level term assurance policy to cover the £325k part.
Simples.
Sheepshanks said:
It's only available as a combined amount if the first parent to die didn't use some it for bequests to other than their spouse.
Yes I know but your point is moot because if they'd used some to make gifts that money would no longer be in their estate. Same net result as giving it all on second death, apart from possible increase in asset value between first and second death. 
steve_n said:
.If they give away more than £325k per person then only the amount above the NRB is eligible for taper relief during the 7yrs that follow after the gift is made. If the gift fails then £325k per person is covered by the NRB (but means the NRB is no longer available to apply to the rest of the estate) and the amount above is liable to an IHT charge that falls on the beneficiary, with taper relief applied if it's been at least 3yrs since the gift was made. This means you need to be careful about having the means to pay the IHT as the recipient of such a gift. There are gift inter vivos life assurance policies that offer reducing cover over the 7yrs to match how taper relief works. You'd then probably also want a 7yr level term assurance policy to cover the £325k part.
Simples.
Shirley the NRB would be applied to gifts, assuming the estate is distributed similarly to gifts (as you’d expect in this case)Simples.
So then the IHT charge is on the estate, not beneficiaries.
Ok if you plan otherwise, but why would you in this case?
It is broadly very very simple, you’ve rather over complicated it.
Gifting avoids IHT at 40pc, all else being equal, and someone living over 7yrs after gifting.
As with everything, plan accordingly… but not using gifting when you can is likely to be hugely tax inefficient.
Mr Whippy said:
It is broadly very very simple, you’ve rather over complicated it.
Gifting avoids IHT at 40pc, all else being equal, and someone living over 7yrs after gifting.
It's simple to give money but I haven't complicated anything, HMRC did. That's how it is.Gifting avoids IHT at 40pc, all else being equal, and someone living over 7yrs after gifting.
If you live 7yrs then it does remain simple, the gift is successful and there's nothing to worry about.
Thanks so much for everyone’s advice and info so far.
Their estate is over the 325 threshold but not as much as 2 million I don’t believe although they’re not forth coming with how much they have but their house alone is around 900k and they are very much the typical baby boomers.
The gift I suspect would be 60/70k for the extension to help us not having to add it to our mortgage and they would pull from savings and their pension. The idea being if they ever needed it back I would pay for their needs until it’s paid back or give them a lump sum. They are still early 60’s and fit and healthy so I don’t expect them to kick it in 7 years.
Their estate is over the 325 threshold but not as much as 2 million I don’t believe although they’re not forth coming with how much they have but their house alone is around 900k and they are very much the typical baby boomers.
The gift I suspect would be 60/70k for the extension to help us not having to add it to our mortgage and they would pull from savings and their pension. The idea being if they ever needed it back I would pay for their needs until it’s paid back or give them a lump sum. They are still early 60’s and fit and healthy so I don’t expect them to kick it in 7 years.
OP might like to read this
http://digitaleditions.telegraph.co.uk/data/1521/r...
Covers the "Gifts out of surplus income" tactic and gives advice on records to be maintained and what counts and what doesn't.
In short can't be out of capital, must be a regular payment from income, and must not leave you short of covering living expenses, holidays etc and not reducing your standard of living. This allows passing on unlimited sums without paying inheritance tax. Important records be kept otherwise the executors might have difficult discussions with HMRC.
Also
https://www.telegraph.co.uk/money/tax/inheritance/...
http://digitaleditions.telegraph.co.uk/data/1521/r...
Covers the "Gifts out of surplus income" tactic and gives advice on records to be maintained and what counts and what doesn't.
In short can't be out of capital, must be a regular payment from income, and must not leave you short of covering living expenses, holidays etc and not reducing your standard of living. This allows passing on unlimited sums without paying inheritance tax. Important records be kept otherwise the executors might have difficult discussions with HMRC.
Also
https://www.telegraph.co.uk/money/tax/inheritance/...
Gassing Station | Finance | Top of Page | What's New | My Stuff