Question
I am thinking of giving some of my assets to my kids and hoping that I will survive another 7 years so they escape IHT. At what point does the taxman calculate his due, at the start of the 7 years with a refund if I survive 7 years, after 7 years, or at the time of my death? Also how is the gift reported to the taxman?
Would your answer be different if instead of giving directly to my kids, I set up a trust?Answer
Inheritance tax is always calculated and paid on death. If you gift assets and live for at least 7 years thereafter, they'll be deemed (by HMRC - the taxman) to have fallen outside of your estate hence won't be liable to inheritance tax when you eventually pass away.
The one proviso when making gits is that you mustn't retain an interest in them, e.g. you can't give away a property and continue to live in it unless you pay a commercial rent.
While you don't need to notify HRMC when you make gifts, it's a good idea to keep notes (including bank statements as proof if applicable) so that the executor of your estate (whose job, amongst others, is to sort out inheritance tax) can take these into account if relevant.
If you were to die within 7 years of making a gift(s) then things become more complicated. Unless the gift(s) total more than the inheritance tax nil rate band, currently £325,000, then their full value effectively remains in your estate (as they must be offset against the allowance before anything else). Any gifts in excess of the allowance are subject to inheritance tax at a reduced rate of between 20% - 80% of the standard 40% rate, depending on how long ago the gift was made (see our inheritance tax page for full details).
The upshot is that unless you're making gifts in excess of £325,000, or expect to live for at least another 7 years, then there's probably little point in making any gifts.
There are however a few annual HMRC allowances that allow you to get money outside of your estate immediately: you can gift up to £3,000 a year in total (and carry forward last year's allowance if unused) plus as many gifts of £250 per person as you want. Wedding gifts of £5,000 for a son/daughter are allowed (£2,500 for other family members) and any gifts made from your taxed income (rather than savings) fall outside of your estate immediately.
Gifting money into trust doesn't really change anything, the main purpose of trusts is to give you control over what happens to the assets after you gift them (e.g. when and how the beneficiary(s) gets them) - useful if you want to stop a teenage grandchild blowing the money on frivolous activities.
The one exception is a discounted gift trust, which allows you to shift some of the gift outside of your estate immediately and receive regular withdrawals (i.e. an income) for life. Essentially, the part of the gift that will provide the withdrawals (called the 'discount') is not deemed to be a gift at all for inheritance tax purposes, because it'll be returned to you over time, so it falls outside of your estate straight away. The size of the discount increases with life expectancy and the amounts withdrawn. But there are also potential downsides - rather than cover discounted gift trusts in depth here, take a look at my answer to this earlier question for more details.
I am thinking of giving some of my assets to my kids and hoping that I will survive another 7 years so they escape IHT. At what point does the taxman calculate his due, at the start of the 7 years with a refund if I survive 7 years, after 7 years, or at the time of my death? Also how is the gift reported to the taxman?
Would your answer be different if instead of giving directly to my kids, I set up a trust?Answer
Inheritance tax is always calculated and paid on death. If you gift assets and live for at least 7 years thereafter, they'll be deemed (by HMRC - the taxman) to have fallen outside of your estate hence won't be liable to inheritance tax when you eventually pass away.
The one proviso when making gits is that you mustn't retain an interest in them, e.g. you can't give away a property and continue to live in it unless you pay a commercial rent.
While you don't need to notify HRMC when you make gifts, it's a good idea to keep notes (including bank statements as proof if applicable) so that the executor of your estate (whose job, amongst others, is to sort out inheritance tax) can take these into account if relevant.
If you were to die within 7 years of making a gift(s) then things become more complicated. Unless the gift(s) total more than the inheritance tax nil rate band, currently £325,000, then their full value effectively remains in your estate (as they must be offset against the allowance before anything else). Any gifts in excess of the allowance are subject to inheritance tax at a reduced rate of between 20% - 80% of the standard 40% rate, depending on how long ago the gift was made (see our inheritance tax page for full details).
The upshot is that unless you're making gifts in excess of £325,000, or expect to live for at least another 7 years, then there's probably little point in making any gifts.
There are however a few annual HMRC allowances that allow you to get money outside of your estate immediately: you can gift up to £3,000 a year in total (and carry forward last year's allowance if unused) plus as many gifts of £250 per person as you want. Wedding gifts of £5,000 for a son/daughter are allowed (£2,500 for other family members) and any gifts made from your taxed income (rather than savings) fall outside of your estate immediately.
Gifting money into trust doesn't really change anything, the main purpose of trusts is to give you control over what happens to the assets after you gift them (e.g. when and how the beneficiary(s) gets them) - useful if you want to stop a teenage grandchild blowing the money on frivolous activities.
The one exception is a discounted gift trust, which allows you to shift some of the gift outside of your estate immediately and receive regular withdrawals (i.e. an income) for life. Essentially, the part of the gift that will provide the withdrawals (called the 'discount') is not deemed to be a gift at all for inheritance tax purposes, because it'll be returned to you over time, so it falls outside of your estate straight away. The size of the discount increases with life expectancy and the amounts withdrawn. But there are also potential downsides - rather than cover discounted gift trusts in depth here, take a look at my answer to this earlier question for more details.
Read this Q and A at http://www.candidmoney.com/questions/question498.aspx
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