Heather Rogers: Find out how to ask her a tax question in the box below
My grandfather is 86 years old and has started giving his money to the family.
He owns his house which is worth around £600,000 and around £200,000 in his bank accounts.
He has recently completed a bank transfer under a memorial ‘gift’ of between £10,000 and £60,000 to his children and grandchildren.
If he dies, will we need to pay inheritance tax?
Our resident tax expert Heather Rogers answers: This is a subject I am asked frequently.
Most of us want to pass on as much of our wealth to our children and grandchildren as possible, rather than have them end up paying 40 percent inheritance tax.
But it is important to note that many people worry about inheritance tax unnecessarily.
Your beneficiaries will be liable if your estate is worth more than £325,000, or £500,000 if there is an estate passing on to direct descendants and the value of the estate is less than £2million.
You don’t mention whether your grandfather is married or widowed, but if his spouse (presumably, your grandmother) is already dead, he may ‘inherit’ his unused allowances where you can double the thresholds.
When these rates are passed, 40 percent of the inheritance tax rate is charged on any assets in the estate with a value above and beyond those rates.
If, based on all of the above, you think your grandfather’s estate will be subject to inheritance tax, then his gifts may make a difference to what is payable to the taxman, depending on how long he lives.
I will explain the gift rules in detail, then return to the meaning of your grandfather’s case.
Inheritance tax rates
Inheritance tax of 40 per cent is usually charged on the deceased’s estate worth more than £325,000, which is called nil level bandexplains Heather Rogers in a previous tax column here.
Most people are allowed to leave an estate worth more than £175,000 without being liable for inheritance tax, if their house is part of their estate and they leave it to their children.
That means children, including adoption, step or foster care, and lineal descendants of children.
This extra amount is called residence band niland available to claim deaths on or after 6 April 2017.
Protected sums or ‘bands’, totaling up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.
An important rule to remember is that if you make gifts during your lifetime, then inheritance tax can be paid when you die, if they are made less than seven years before the date of your death.
Gifts made within seven years of your death use the £325,000 allowance first, and any unused allowance will be paid against the value of the estate when you die.
What? What is a gift for inheritance tax purposes?
The prize can be:
– Property and land (unless eligible for agricultural property relief)
– Antiques and jewelry
– Shares that are not eligible for trading relief
– Anything you sell to someone for less than market value; the difference between the market value and the sale amount will count as a gift to that person if you die within seven years of the date of the gift, and then inheritance tax may be payable on all or some of the gifts you made.
What gifts are NOT subject to inheritance tax?
– Gifts between spouses, as long as they are married or in a civil partnership, as long as they live in the UK.
– Gifts to registered charities.
– Rewards for political parties, provided they have at least two MPs for special seats or a certain number of votes.
– Gifts to heritage organizations, such as the National Trust.
– Gifts worth less than the annual gift allowance of £3,000, which everyone can give free of inheritance tax for the tax year.
£3,000 can be given to one person, or split between several people. If you do not use the allowance, or the full allowance for the previous tax year, then you can add it to the current tax year.
Inheritance tax: My 86-year-old grandfather makes large cash gifts to family members – what are the rules?
That means you can take out up to £6,000 in that tax year, but if you don’t use the full amount from the previous year you will lose it. All rewards are deducted against the original allowance first.
– Gifts given on special occasions. Each tax year you can also make gifts during a marriage or civil partnership: up to £5,000 per child (including adopted or step children); up to £2,500 per grandchild (or distant descendant); up to £1,000 for anyone else.
You can also combine allowances, for example you can give £5,000 for a marriage and spend your £3,000 on the same person at the same time.
– Gifts worth less than the limited gift allowance, which allows you to make as many gifts of up to £250 per person as you want each tax year, as long as you have not used another gift allowance for the same person in the same tax year. .
– Gifts given on birthdays and Christmas, which come out of your regular income (see below what it means).
– Gifts given as regular payments to another person to help with their living expenses.
There is no limit to how much you can give tax-free, as long as you can afford the repayments after meeting your normal living expenses and paying them out of your normal monthly income.
These gifts are known as ‘ordinary expenditure outside of income’. Examples might include paying your child’s rent, paying for a child under 18 in a savings account, and helping an elderly relative financially.
If you are giving a gift to the same person, you can combine ‘ordinary spending outside income’ with any other allowance, for example your £3,000 annual gift allowance.
However, you cannot combine regular pay with a small gift allowance.
When do you pay inheritance tax on gifts?
Any gift not covered by the tax-free rules above is subject to the seven-year statute.
If you live for seven years after the date of the gift, then inheritance tax is payable based on the period of time that has passed between the date of the gift and your death.
The value of the gift is not reduced, but the tax rate applicable to it is.
Gift between 0 and 3 years: 40 percent
Gift between 3 and 4 years: 32 percent
Gift between 4 and 5 years: 24 percent
Gift between 5 and 6 years: 16 percent
Gift between 6 and 7 years: 8 percent
No inheritance tax is payable on gifts made seven years and more before your death.
If gifts made within seven years of death increase to less than £325,000, then because the gifts are calculated against the nil price band first before any other assets, that means there will be no tax to pay on them.
Once you give away more than £325,000 in the seven years before your death, anyone who receives a gift from you will have to pay inheritance tax personally on their gift at the above tax rates.
The latter can get many people out.
What about making gifts honest?
Gifts made in trust are subject to an immediate 20 per cent inheritance tax charge where the value of the gift exceeds the realized price of £325,000.
However, the nil rate band restarts every seven years, and this means that significant gifts can be made free of inheritance tax during an individual’s lifetime.
Be careful though, because in some cases gifts in trust create immediate inheritance tax bills, and if you’ve made a series of gifts over time, then gifts up to 14 years before your death can affect the amount of tax paid on them.
What records should you keep?
Your executors will need to calculate what gifts you gave in the seven years before your death. You should keep the following records:
– What did you give and who did you give it to?
– The value of the gift
– The date you gave.
It seems your grandfather records his gifts through bank transfer records he sends to his family members.
What are the common pitfalls that people fall into in gift giving?
– Gifts made to another person where you still benefit from the gift – for example, if you give your house to a relative but they are still living without paying market tax, it will be subject to inheritance tax.
– Gifts of money used to buy something that you benefit from – for example, if you give money to a relative to buy a house, but you live in it, this will also be subject to inheritance tax.
– Gifts of property in lieu of cash can also result in capital gains tax being charged to the person receiving the property.
What do you need to remember about your grandfather’s gifts?
If the gifts made by your grandfather in the seven years before his death do not exceed £325,000 then because (as explained above) they are counted before any other assets in the estate, no inheritance tax will be payable on them.
Otherwise, inheritance tax will be charged on the estate in full, less any unused £325,000 and subject to any other allowances available.
These allowances can include her estate band (worth up to £175,000 more than her estate) and any non-payment bands that can be transferred from a predeceased spouse (worth up to £500,000 more).
Ask Heather Rogers a tax question
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. He is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax and much more.
If you would like to ask Heather a question about taxes, email her at [email protected]. Please put THE TAX QUESTION in the subject line.
Heather will do her best to respond to your messages in future monthly columns, but will not be able to respond to everyone or contact readers privately. Nothing in his answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
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If Heather can’t answer your question, you can also contact MoneyHelper, a Government-backed organization that provides free financial help to the public. It can be found here and its number is 0800 011 3797.