Heather Rogers: Find out how to ask her a tax question in the box below
My grandfather is 86 and has started gifting his money to the family.
He owns his own house which is worth around £600,000 with around £200,000 in his bank accounts.
He has recently completed bank transfers under the reference ‘gift’ of between £10,000 and £60,000 to his children and grandchildren.
In the event he passes away would we need to pay inheritance tax?
Our resident tax expert Heather Rogers replies: This is a subject I get asked about regularly.
Most of us want to pass on as much of our estate to our children and grandchildren as we can, rather than have them end up paying 40 per cent inheritance tax.
But it is important to note that many people worry unnecessarily about inheritance tax.
Your beneficiaries will only be liable if your estate is worth more than £325,000, or £500,000 if there is a property being passed to direct descendants and the estate value is less than £2million.
You don’t mention whether your grandfather is married or widowed, but if his spouse (likely, your grandmother) has died already, he might have ‘inherited’ her unused allowances in which case you can potentially double those thresholds.
Once these thresholds are passed, the 40 per cent inheritance tax rate is levied on any assets in the estate worth above and beyond those levels.
If, given all the above, you think your grandfather’s estate will be liable for inheritance tax, then his gifts might make a difference to what is due to the taxman, depending on how long he lives.
I will explain the rules on gifts in detail, then return to the implications for your grandfather’s case.
Inheritance tax thresholds
Inheritance tax of 40 per cent is typically levied on a deceased person’s assets worth over and above £325,000, which is called the nil rate band, explains Heather Rogers in a previous tax column here.
Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.
That means children, including adopted, step or fostered, and those children’s linear descendants.
This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.
Both protected amounts or ‘bands’, adding 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.
The important rule to remember is that if you make gifts in your lifetime, then inheritance tax could be payable on them when you die, if they are made fewer than seven years before the date of your death.
Gifts made within seven years of your death use up the £325,000 allowance first, and any remaining allowance not used will be offset against the value of the estate when you die.
What is a gift for inheritance tax purposes?
A gift can be:
– Property and land (unless it qualifies for agricultural property relief)
– Antiques and jewellery
– Shares that do not qualify for business relief
– Anything you sell to someone for less than market value; the difference between the market value and 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 due on all or some of the gift you have made.
What gifts are inheritance tax NOT payable on?
– Gifts between spouses, providing they are married or in a civil partnership, as long as they live in the UK.
– Gifts to registered charities.
– Gifts to political parties, providing they have at least two sitting MPs or a certain number of votes.
– Gifts to heritage organisations, like the National Trust.
– Gifts worth less than an annual gift allowance of £3,000, which each person can give free of inheritance tax per tax year.
The £3,000 can be given to one person, or split between several persons. If you do not use the allowance, or full allowance for the previous tax year, then you can add that to the current tax year.
Inheritance tax: My 86-year-old grandfather is making large cash gifts to family members – what are the rules?
That means you can give 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 gifts are offset against the earlier allowance first.
– Gifts made on special occasions. Each tax year you can also gift on the occasion of marriage or a civil partnership: up to £5,000 to a child (including adopted or step children); up to £2,500 to a grandchild (or remoter descendant); up to £1,000 to any other individual.
You can also combine allowances, so for example you could gift £5,000 for marriage and use your £3,000 to the same person at the same time.
– Gifts worth under the small gift allowance, which permit you to give 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 on the same person in the same tax year.
– Gifts made on birthdays and at Christmas, which you give from your regular income (see just below for what that means).
– Gifts made as regular payments to another person to help with their living costs.
There’s no limit to how much you can give tax free, as long as you can afford the payments after meeting your usual living costs and you pay from your regular monthly income.
These gifts are known as ‘normal expenditure out of income’. Examples can include paying rent for your child, paying into a savings account for a child under 18, and assisting an elderly relative financially.
If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, for example your annual £3,000 gift allowance.
However, you cannot combine regular payments with the small gift allowance.
When do you pay inheritance tax on a gift?
Any gift not covered by the tax free rules above is subject to the seven-year rule.
If you live for seven years after the date of the gift, then inheritance tax is payable depending on the period of time that has elapsed from the date of the gift and your death.
The value of the gift is not reduced, merely the rate of tax that is applied to it.
Gifts between 0 and 3 years: 40 per cent
Gifts between 3 and 4 years: 32 per cent
Gifts between 4 and 5 years: 24 per cent
Gifts between 5 and 6 years: 16 per cent
Gifts between 6 and 7 years: 8 per cent
No inheritance tax is payable on gifts made seven years and over before your death.
If the gifts made within seven years of death add up to less than £325,000, then because gifts are calculated against the nil rate band first before any other assets, that means there will be no tax to pay on them.
Once you’ve given away more than £325,000 in the seven years before your death, anyone who gets a gift from you will have to pay inheritance tax personally on their gift at the tax rates above.
The latter can catch a lot of people out.
What about making gifts into trust?
Gifts made to trusts are subject to an immediate inheritance tax charge of 20 per cent where the value of the gift exceeds the available nil rate band of £325,000.
However, the nil rate band starts again every seven years, and this means that significant gifts can be made free from inheritance tax during an individual’s lifetime.
Beware though, because in some cases gifts into trusts create immediate inheritance tax bills, and if you have made a series of gifts over time, then gifts up to 14 years prior to your death may affect how much tax is payable on them.
What records should you keep?
Your executors will need to work out what gifts you gave in the seven years before your death. You should keep the following records:
– What you gave and to whom you gave it
– The value of the gift
– The date you gave it.
It sounds like your grandfather is documenting his gifts via records of the bank transfers he is making to his family members.
What common traps do people fall into over gifts?
– Gifts made to another person where you still benefit from the gift – for example, if you gift your house to a relative but still live it in without paying market rent, it will be liable for inheritance tax.
– Gifts of money used to buy something from which you then benefit – for example, if you gift money to a relative to buy a house, but then you live it in, this will also be liable for inheritance tax.
– Gifts of assets rather than cash can also give rise to a capital gains tax charge on the person disposing of the asset.
What do you need to bear in mind regarding 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 calculated ahead of 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 of the £325,000 not used and subject to any other allowances available.
These allowances might include his residence nil rate band (worth up to a further £175,000 of his estate) and any nil rate bands transferable from a spouse who has predeceased him (worth up to a further £500,000).
Ask Heather Rogers a tax question
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She 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 tax, email her at firstname.lastname@example.org. Please put TAX QUESTION in the subject line.
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If Heather is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. It can be found here and its number is 0800 011 3797.