v.quick IHT question

That's because there's no liability for any tax after that. All genuine gifts made by anyone to anyone more than 7 years before the donor's demise are not taxable.

If it is a genuine gift - parent gifts the money with no expectations of ever seeing it back, and without any conditions at all on what the child can do with it - then after 7 years no tax is due.

If the gift is with reservations, paid into a trust, or is in any other way not a straightforward gift, other rules apply.

If you don't understand what your accountant said, the best person to ask is your accountant.

Mouse

I suspect you have misunderstood.

After 7 years, the gift will become totally exempt from IHT.

But for *income tax* purposes, the *interest* on the gift (assuming we're talking about a gift of money which the child keeps in a savings account in its own name or in some responsible adult's name "in trust for" the child) will be taxed as if it were the parent's income (and therefore usually at 20%).

As this rule has nothing to do with inheritance, it is unaffected by the 7 year limit. It applies until the child turns 18 (or 16, more likely).

This rule applies only to gifts from parents, and exists in order to prevent parents moving their own savings into the names of their children (on paper only, whilst still regarding the money as their own) in order to escape taxation of the interest.

Sounds like you're referring to IHT taper relief. This means that after 6/5/4/3 years, only 20/40/60/80% of the value of the gift will be treated as part of the estate. Forget about this. It is only relevant where the donor has already given away in excess of the IHT exempt amount.

Suppose X gives £103k each year to Y, for 7 years, and then dies, having made no major gifts to anyone else. The remaining estate is worth £500k.

£3k of each year's gift is exempt as a "small gift". The first 3 years' £100k gifts use up the estate's nil rate band, which currently is conveniently £300k, so there is no tax to pay on them.

The 4th year's £100k receives 20% relief because if was made more than 3 years prior to death, and so only 80% of it is taxable. The remaining 3 years' gifts are counted in full (because they were made less than 3 years prior to death). The IHT bill is 40% of £880.

Suppose instead that the gifts were £203k each year and that the residual estate is £520k.

Year 1's £200k is not taxed but uses up 2/3 of the NRB. Half of year 2's £200k is not taxed but uses up the remaining 1/3. The other half receives 80% relief, so counts as £20k. Gifts from years 2/3/4 receive 60/40/20% relief, so count as £80/120/160k. Gifts from years 5/6/7 receive no relief and each count as £200k.

Total: £20+80+120+160+200+200+200+520k = £1500k. Tax bill is £600k. This means there are insufficient funds in the residual estate to pay the tax bill, so £80k of it will need to be paid by the recipients of the gifts from years 3 to 7 and the 2nd half of year 2. If the gifts were all to the same person, there's no problem (unless it's all been spent), but otherwise some horse trading will ensue as to who should cough up how much.

< snip >

But, sadly, applies even if a genuine "no strings" gift :-(

Luckily, that's why we keep the grandparents alive :-)))

Wow.. as always, a thorough explanation. Thank you.

Would the IHT for dummies version be:

Ignoring the 300k NRB, the 3k/year allowance etc etc, in theory if the parents gifted 50m pounds with no conditions at all, and they lived for 10 years after making the gift, no tax is due on anything other than any interest etc generated from the 50m (which is essentially income tax) from day 1 of "year 8"?

Sorry to labour this, but it's not an accountant, but a new financial adviser who I'm not 100% confidence with when it comes to IHT (according to them, the zero tax after 7 years rule has been abolished, and even after say 10 years the "inheritor" still has to pay 20% tax on the amount above NRB).

No, any interest which a child earns on any money which has been gifted by his/her parents counts -for income tax purposes- as the parents' rather than the child's income, until the child stops being a minor (which I think for present purposes means age 16), from which point on it counts as the child's own income. This is from (as you would put it) day 1 of year 1, i.e. from as soon as the child earns interest on the money in question.

If the sum involved is £50M, and the interest rate is 5%, that's £2.5M a year to be taxed, nearly all at 40%. When it's so much, it doesn't much matter whose income it is, since on that amount nearly all of it would be taxed at 40% in any case.

With a more realistic but still huge sum, say £100k, one would normally expect the interest thereon to be below the child's personal allowance, so if it were counted as the child's income, no tax would be due *but for* this special rule, whereas you might expect the parent to be a 40% taxpayer.

I suspect what he says applies only to certain types of trust. I'm not really up on trust rules, but I've a vague idea that it involves paying 20% up front (when the money is put into the trust) and then an additional 10% on each 10th anniversary. Which is odd, since if the dosh stays in trust for long enough, you end up paying more IHT than just leaving the money in your will.

I don't think outright gifts are affected by trust rules.

That's very interesting but doesn't work at all the way I expected.

So lets say someone has a 1M estate and gives away 300K. They die in year 7. (Lets ignore the 3K bit)

What you are saying is that, despite the fact the gift has been given for seven years, the entire value of the gift is used to reduce their IHT allowance and so their estate will pay exactly the same tax as it would have done if no gift had been made?

What I had expected to happen was:

300K*20%`K. So 60K of the allowance is used up. Then the remaining 240K of allowance reduces the rest of the estate to 460K. So the estate pays tax of 40%*4604K

If I understand your example correctly you are saying the estate would pay 40%*700K(0K.

Tim.

Thanks for clarifying, am all clear now. You've all been a great help =)

Raj

Yes.

Imagine the gifts sitting in the bottom of the cup with the earliest at the bottom. You only pay IHT when the overall liability overflows the cup, and you only get relieif on the IHT paid.

Since the gifts are always at the bottom of the cup - unless they themselves start overflowing the cup - they are never taxed and there is no relief. The last of the gifts will be taxed to the extent that they overflowed the cup, so if someone gives you a large sum of money ask them how much else they've given, and maybe put some aside for the tax man :)

Yes, that's right, because the gift has *not* been "given for seven years". More than 6 but less than 7 years have elapsed between the gift being made and the donor dying, as that is what I understood you to mean by dying "in year 7", i.e. before the 7th complete year has elapsed. If they died *after* year 7, the gift would be out of scope, and the 300k exempt amount would reduce the remaining 700k to 400k taxable, leading to an IHT bill of only 160k.

Yes.

No, that's not what happens. Gifts use up the allowance first, in chronological order. Only once the allowance is used up does the

80/60/40/20% relief come into operation. If any of the allowance remains unused after all the gifts have been counted, the rest is then applied to the value of the actual assets at death.

So if they had given away a second 300k later in year 1, then the first 300k would use up the allowance, i.e. it would receive 100% relief, and the second 300k would attract 80% relief. The estate would be worth 1000k-300k-240kF0k and the tax bill would be 184k.

very well put. This point is often incorrectly stated even in guide books on IHT. Many people seem to think that the taper applies to the bequest, but, as you have said, it applies to the tax which is very likely to be zero for the earliest gifts.

A seocnd point. Don't forget that, in addition to the £3000 per year allowance, there can also be "regular gifts are made out of income" ; they don't count towards IHT and there is no upper limit to the amount. However the executors will have to show that the deceased's income was, at the time, enough to make the payments without dipping in to capital. This can be very useful if the giver has an income beyond what they need to live on.

Robert