Inheritance Tax hypothetical Scenario

Not a real situation (I hope!) but I wondered what might happen if ...

To keep it simple assume that daughter already has assets equal to the IHT threshold and is not married. Also parent after gift still has sufficient assets to be liable for IHT

Parent gave daughter say £300k to buy a house.

Daughter dies after 12 months which would presumably mean her estate was liable to potentially pay IHT @ 40% on the 300K

Treasury therefore take £120k

Parent dies 12 months later.

Question - would the gift to the daughter as a Potentially Exempt Transaction within 7 years of gift (PET)still be counted as part of the parent's estate (which would be the normal situation) or because IHT had already been paid once would it be ignored.

ie if another 40% charge the treasury would have had £260k out of the original £300k in tax in 24 months.

My initial reaction was of course they wouldn't but the way this government works it would not surprise me if they could have their cake and eat it.

Cheers

A
Reply to
Alan
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You mean £240k.

Actually, it's even worse. If the daughter had no other heirs, her parents would inherit her assets, and thereby augment their estate, so the sum would be taxed thrice, first as a PET, second as part of the daughter's estate, and third as (again) part of the parent's estate.

They're good at getting blood from stones, or, in this case, at getting £360k out of £300k.

Reply to
Ronald Raygun

... maths never was my strong point.

Off subject slightly but the other thing that occurred to me is that you only (I believe) have 12 months to pay the IHT. I wonder if the Linley's (Princess Margaret's children) are paying interest to HM Treasury as they are well outside the 12 month window with their mother having died in 2002.

Or another rule for the royals ...

A
Reply to
Alan

I it would only be taxed twice - the first time as part of the daughter's estate, and the second as part of the parent's estate. Of course the second time it would count twice - both as the PET and at its value in the parent's estate...

It's the donor that has to survive 7 years, not the recipient.

And it's not actually going to be at 40% - it will receive its proportionate share of the nil rate band exemption both times.

But ICBW. And it's still bad enough.

Reply to
dtren

Indeed, so although it's taxed only twice, the same sum of money suffers three tax deductions.

Well, both the sum involved and the remainders of both estates are in excess of the NRB, and it makes sense to prefer to think of the NRB as exempting part of the remainders.

For instance, given that the daughter already had other assets in excess of the NRB, the effect of receiving the £300k gift is to increase her estate's IHT bill by £120k.

The parent's estate will be taxed £120k more as a result of the PET being clawed back into it, *and* the parent's estate will be worth £180k more (and hence taxed £72k more) as a result of having inherited their gift back from the daughter.

So the taxman benefits to the tune of £312k.

To be fair, though, had the parent *not* made the gift, their estate would have been worth £300k more, so the taxman would have got £120k from that money anyway. So making the gift benefits the taxman £192k more than not making the gift.

Now suppose instead that the parent dies before the daughter. If this happens within 2 years (no taper applies), the taxman benefits exactly the same whether the gift is made or not. If this happens within 7 years (taper only applies to the excess of gift above NRB so its effect is negligible, and in any case 7 years from now the NRB will almost certainly exceed 300k anyway) the effect is the same. If it happens later, the gift escapes tax.

So there is an advantage of £120k in making the gift in one case, but a disadvantage of £192k in making the gift in another. So when deciding whether to make the gift, it should be considered whether the odds of the parent surviving 7 years but predeceasing the daughter are better than those of the daughter predeceasing the parent. It should also be considered who would inherit from the parent in the absence of the daughter. It might not matter as much to the parent and daughter if the taxman got more if they're both gone.

Reply to
Ronald Raygun

Firstly, the IHT liability would reduce the value of the daughter's estate, so it would be taxed on what was left after paying it.

Secondly, the daughter's estate would get quick succession relief.

Reply to
Jonathan Bryce

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