Father (88) gifts/loans son money - IHT question

Ana: I suppose a person receiving a lifetime gift could have gone broke and, therefore, be unable to pay.

Simply refusing to pay would presumably not remove the liability for the tax. I guess, but do not know, that if the executors could not persuade such a person to pay within a time limit, the estate would have to pay and, if sensible and economic to do so, pursue the debt until it is paid.

M0nica: Unless I am mistaken, the original question in this thread was about the IHT on a gift before death which is what I have tried to address. For gifts before death, liability to IHT falls on those who received those gifts. However, it is my understanding that, if an appropriate clause is included in the will, the estate can pay the IHT due upon those gifts during life. It seems a sensible way for a person giving money away before death to ensure that the person receiving the gift does not face a tax bill in future.

I notice that the new IHT relief on own homes tapers away to nothing on large estates over £2m. So, for large estates, the IHT exemption remains at £325,000 per person.

I think the new relief was introduced, in part, to protect children living in the family home from having to sell their home to pay IHT when a parent dies. The average house price in the SE is over £300K and, in London, almost £500K so this situation, with just a single £325,000 exemption, could arise.

However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due.

If they can't or will not pay, the amount due then comes out of your estate.

That bit's interesting. So someone who's received a gift within the 7 year period can refuse to pay the IHT payable on it...?

Cunco the sentence you highlight deals with money disposed of before you die. For assets still in your estate when you die, it is paid from the estate.

Yes, I agree that those in the fortunate position to pay tax should do so or 'pay up and look big', as my Dad would say (although more in the context of buying a round of drinks than tax since he was never wealthy.

I am still unclear about the nitty-gritty of IHT, though.

Thu 02-Mar-17 13:59:11

Great post, M0nica. I agree with you completely.

M0nica: I have read your comments and googled but I am still left unclear. Which?
says on its website:

Who pays the inheritance tax bill?

Inheritance tax that becomes due on money or possessions passed on when you die is usually paid from your estate. Basically, your estate is made up of everything you own, minus debts such as your mortgage and expenses such as funeral expenses.

However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due.

If they can't or will not pay, the amount due then comes out of your estate.

www.which.co.uk/money/tax/inheritance-tax/guides/inheritance-tax-thresholds-rates-and-who-pays

This still leaves me unclear. I think I will ask a friendly solicitor to explain.

IHT will be deducted from an estate before any money is paid out. All beneficiaries left named amounts, assuming there is enough to cover them, will get their full amount, leaving the residuary legatee, the person who gets what is left, with less than they had hoped/expected.

You have to have a minimum estate of £350,000, after any donations to charity (which is tax-exampt) and paying all debts, and for some couples it is considerably more. The situation cannot arise that the IHT payment exceeds the value of the estate since it is based on the value of the estate after the substantial tax-free allowance has been deducted.

Going back to the original question, I am not an expert but my current understanding is that the IHT can be paid by the residuary estate if it has sufficient funds and the will of the person who dies includes a clause which allows this to happen.

Without such a clause, I think the IHT on a gift falls on the person who receives the gift rather than the estate.

As for compensating for house price inflation - why? Other types of capital have 'inflation' ( ie go up in value) - it's a cheap political stunt and thoroughly disgraceful.

What i do know about the new rules is that a house is being treated differently from other types of capital and that is simply and completely unfair. And wow MOnica, great post.

I think there may be some misunderstanding of the new rules here. In 2017/18 there is an additional £100000 "allowance" if a home is left to a direct descendent, this is to compensate for house price inlation. The allowance is going up each year for the next 3 or 4. There is no new million pound allowance, that figure comes from the two partners £325k plus the additional house bit. There is a new explanation on the .gov site if you google IHT

Apart from anything else, the new regulations are making a fairly simple system complicated.

I have no complaints about paying IHT anyway. You have to have assets over £350,000 to pay it and the bigger your estate the more you pay. You know in advance that it will be due and can make decisions to specifically set money aside to pay the IHT bill.

As far as the beneficiaries are concerned, a legacy is a windfall sum of money, but with odds better than the lottery. As a general rule the better off the deceased the more likely that their children will have had a good education and gone on to university and have a reasonable job so the windfall goes to individuals who are generally doing OK in life.

In my life I have benefited from the infrastructure that generations before me have paid tax for - school, roads, gas and electricity supply lines etc, why should I complain if the state demands a share of my estate to benefit those that follow after me.

I'm not sure what I think about IHT. In theory it feels like a sensible tax, but the anomalies are a real problem. I have to say I also have some sympathy for people who have worked very hard for decades to pay off a huge mortgage and then want to leave the fruits of their labour to their children. I think an idea might be to scrap many of the exemptions but decrease the rate of tax. But I really don't know - with all these things once you get into the detail all sorts of problems pop up which you hadn't thought about.

Fitzy I'm surprised there isn't more outrage about this - I expect it's because until it happens most people don't realise it's going to happen. This change just adds to my belief that we should get rid of IHT and raise the money lost in a different way.

Rigby, I agree. Exempting that one particular asset more than others doesn't really make any sense, whether you are a fan of IHT or don't like the concept at all.

I was appalled when the changes were announced some while ago. I really don't see why a family home upto a £1m is exempt from IHT but any of your estate is in eg shares, savings comes into the normal IHT limits. I think at the time there were arguments put forward about keeping the family home in the fsmily - that sounds like such upper class tosh IMO . I wonder in reality how many family homes are kept within the family as opposed to sold and the proceeds shared out amongst the beneficiaries?

Howard I'm not sure the loan from your father idea will help. I don't think legally you can turn what was a gift into a loan after the event. If it was a gift when made, I would think that's the end of the story as far as IHT is concerned. You would need to check though - I'm no expert. I guess you could maybe make the repayment an interest free loan to your father repayable on his death from the estate. Again, you would have to ask somebody who really knew what they were talking about, but it seems to me that in that case you would have to pay tax on the original loan but not in the amount repaid to you by the estate? You certainly don't want to pay twice!

Thanks Monica.will have a read.

I haven't gone into the detail, which I understand is more complicated than originally planned, but as far as I can see the IHT limit for married couples goes up by £350,000, but I think is dependent on there being a family home that has been lived in at some time by the deceased as their home.

If you have made a will which includes a trust, this can negate this extra money. Again I am not sure how it works. I have only just realised all these changes come in on 1 April and I am going to contact our solicitor this week to see how this affects this and whether we will need to change parts of our wills.

There are several websites like this one which can help you
www.thisismoney.co.uk/money/mortgageshome/article-3720130/What-know-inheritance-tax-family-home-allowance.html

I didn't know that Monica. So if the family home no longer counts re IHT what about additional monies? Do you know?

IHT is paid from the estate. The only way the estate cannot afford to pay the IHT is if someone gives everything they possess, usually the house, to someone not long before their death.

However, the law is changing on 1st April, that is when the new law about the main family home being exempt from IHT comes in (providing the value is under £1 million)

I found this quote. It is quite old but may well be current. The recipient of the failed PET (Potentially Exempt Transfer) is normally responsible for paying the tax. PETs include gifts where the donor dies within 7 years.

Maybe the way to avoid a problem is for the donor to leave sufficient funds to the person receiving the gift to cover any tax liability that person might incur.

I think it comes out of the estate, as he would have been excused paying tax on the amount that he gave as the gift, so he (well, his estate) is the one who has to pay the tax if he dies before the seven years are up (the tax is graduated down if it is between 3 and 3 years).

I think it would come out of the estate as well, but like you, am not absolutely sure.